Friday, November 18, 2011

Time for Germany to show leadership

Great piece by (interest declared) my friends Matthias Matthijs and Mark Blyth in Foreign Affairs: Why Only Germany Can Fix the Euro. They argue that Germany is copping out of its responsibilities: 'As the eurozone's biggest economy, it was Germany's job to stabilize the system when the first signs of financial trouble appeared. Instead, it did precisely the opposite. Whether the euro survives depends on Frankfurt finally assuming its role as leader.'

The argument is similar to Wolf's but punchier. And there are some valuable home truths thrown in. That Germany's virtue is the mirror image of Southern Europe's supposed vices, that Germany can only be like Germany if others are like Greece, that deflation can only end in disaster, and that the answer lies with the ECB acting as a lender of last resort. Some great data snippets in there too: the Euro engineered the colossal current account imbalances within Europe that have created the problem. So

Between 2000 and 2007, Greece's annual trade deficit with Germany grew from 3 billion euro to 5.5 billion, Italy's doubled, from 9.6 billion to 19.6 billion, Spain's almost tripled, from 11 billion to 27.2 billion, and Portugal's quadrupled, from 1 billion to 4.2 billion.

Basically, the Euro locked Southern Europe into acting as the borrower of first resort for German savers. Then when the music stopped, they asked for it back, all at once. Too late.