Daily Bulletin


The Conversation

  • Written by The Conversation
imageUnfortunately, the eurozone doesn't exactly fit together like a puzzle.Euro puzzle via www.shutterstock.com

Germany demanded unconditional surrender from Greece and got what it wanted.

The result is that severe punishment in the form of austerity will continue, along with the humiliation of the Greek people. Democracy in the eurozone has been severely strained.

While the six-month battle between Greece’s anti-austerity Syriza government and its German and other creditors resulted in a deal this weekend that prevents a Grexit for now, this much is clear: there will be no end to Europe’s economic malaise, of which Greece is only the most extreme case.

Rather, the gradual dismantling of the euro – a project of integration that began in 1999 and brought 19 countries together under a single currency – will continue as long as its biggest member refuses to ease up on the austerity and other policies that are suffocating Europe’s economy.

The Greeks themselves, of course, cannot be pardoned from their fair share of blame for their predicament, as I’ve noted many times.

But Germany as Europe’s powerhouse is the one running the show. And based on my experience and research, it bears a large share of the blame both for creating many of the conditions that led us here and by showing little to no flexibility in resurrecting Greece’s economy.

Another dose of austerity

The sad truth is that Germany’s finance minister – who has pushed austerity on all its neighbors including Greece at any cost, despite the often abysmal results – remains firmly in charge of economic policy and is determined to impose more of the same folly.

The eurozone remains stuck in a process of competitive internal devaluations – in which members suppress wages to boost their competitiveness – that suffocate domestic demand. This leaves the currency block extraordinarily vulnerable.

Continuing to freeload on external demand through euro depreciation, thereby also undermining the global recovery, excessive thrift (via austerity) rather than investment leaves the land of the euro destined for socioeconomic stagnation.

And if it can be believed, another especially high dosage of that austerity has been reserved for Greece, even though it is already suffering a humanitarian crisis.

What happened to political integration

Matters are even worse politically. The idea of European integration as a means to secure peace and prosperity was founded on solidarity, tolerance and compromise – a supposed union of equal partners, ending Europe’s long history of conflict and domination.

The euro in particular was meant to end Germany’s monetary hegemony over the continent that characterized the previous currency arrangement: the European Monetary System.

The plan backfired badly. By undermining everyone else’s competitiveness through persistent wage repression, Germany has maneuvered itself into a hegemonic creditor position that has secured the country even more leverage over the economic policies of its “partners.”

In other words, low labor costs at home have made it easier for German manufacturers to undercut its competitors' prices, leading to a massive trade surplus relative to most countries in the euro. The corresponding deficits have left Germany’s euro partners in their vulnerable debtor positions.

Greece merely provides the most clear-cut case: offered the choice between Grexit and the de facto replacement of its sovereignty with external control over financial and other policies, Greece, for the time being at least, is opting for the status of a vassal state.

Greece’s blame, Germany’s forgiveness

Greece is neither flawless nor blameless. Compared with its peers, it suffers from more than its fair share of corruption. It fudged its numbers and broke the euro’s fiscal rules by a wider margin and for more years than Germany itself.

But if Germany at least in part believes that Greece must be punished for its sins, it should look to its past and the magnanimity with which it was dealt after World War II: with the Marshall Plan and London Debt Agreement, which resulted in the forgiveness of 60% of German foreign debt, according to Thomas Piketty.

Why is Greece’s case so much different, and by what kind of moral, political or economic standards can the deal be justified?

France, a counterweight no more

France has often been a counterweight to Germany in these matters, and at times, including this past weekend, tried to fight in Greece’s corner. But in the face of German rigidity, it was able to achieve only a deal that provided the Greeks with a draconian choice: Grexit or vassal.

For not even France, pressured to restore its competitiveness vis-à-vis Germany and embrace austerity more fully, is more than a junior partner these days.

This outcome is clearly unsustainable. A plan such as the one I suggested earlier this year that would create a European treasury – in a move toward a closer union – could help solve the economic and fiscal problems that plague Europe and spur much-needed investment. Unfortunately, Germany stays on this destructive course.

As a German, I am simply dismayed by the unrelenting conduct of my government, which reached a new climax this weekend when it dug its heels in further than ever before.

But there is no way around it: this weekend has pushed European integration firmly into reverse, and the pessimist in me has to admit that at some point “Germexit,” a German exit from the euro, would probably be the least terrible outcome for Europe.

Joerg Bibow is affiliated with: Levy Economics Institute of Bard College and the Bretton Woods Committee.

Authors: The Conversation

Read more http://theconversation.com/greeces-total-surrender-to-german-demands-shows-failure-of-euro-integration-44636

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