by Charles Hugh Smith
May 29, 2018
version of this essay was published here on June 23,
2011. Nothing structural has changed in the seven years
since the original publication.
Papering over the
structural imbalances in the Eurozone with endless bailouts will not
resolve the fundamental asymmetries.
Beneath the permanent whatever it takes "rescue" by the European
Central Bank (ECB)
lie fundamental asymmetries that doom the euro, the joint currency
that has been the centerpiece of European unity since its
introduction in 1999.
The key imbalance is between export powerhouse Germany, which
generates huge trade surpluses, and its trading partners, which run
large trade and budget deficits, particularly,
Those outside of Europe
may be surprised to learn that Germany's exports are roughly equal
to those of China ($1.2 trillion), even though Germany's population
of 82 million is a mere 6% of China's 1.3 billion.
Germany and China are the
world's top exporters, while the U.S. trails as a distant third.
Germany's emphasis on exports places it in the so-called
mercantilist camp, countries that depend heavily on exports for
their growth and profits.
nations that routinely generate large trade surpluses include,
While Germany's exports
rose an astonishing 65% from 2000 to 2008, its domestic demand
flat-lined near zero.
Without strong export
growth, Germany's economy would have been at a standstill. The
Netherlands is also a big exporter (trade surplus of $33 billion)
even though its population is relatively tiny, at only 16 million.
The "consumer" countries, on the other hand, run large
current-account (trade) deficits and large government deficits.
instance, has a $55 billion trade deficit and a budget
deficit of about $110 billion. Total public debt is a
whopping 115.2% of GDP.
Spain, with about
half the population of Germany, has a $69 billion annual
trade deficit and a staggering $151 billion budget deficit.
Fully 23% of the government's budget is borrowed.
This chart illustrates
the dynamic between mercantilist and consumer nations:
Although the euro was
supposed to create efficiencies by removing the costs of multiple
currencies, it has had a subtly pernicious disregard for the
underlying efficiencies of each eurozone economy.
Though German wages are generous, the German government, industry
and labor unions have kept a lid on production costs even as exports
As a result, the cost of
labor per unit of output - the wages required to produce a widget -
rose a mere 5.8% in Germany in the 2000-09 period, while equivalent
labor costs in Ireland, Greece, Spain and Italy rose by roughly 30%.
The consequences of these asymmetries in productivity, debt and
deficit spending within the eurozone are subtle.
In effect, the euro gave
mercantilist, efficient Germany a structural competitive advantage
by locking the importing nations into a currency that makes German
goods cheaper than the importers' domestically produced goods.
Put another way:
By holding down
production costs and becoming more efficient than its eurozone
neighbors, Germany engineered a de facto "devaluation" within
the eurozone by lowering the labor-per-unit costs of its goods.
The euro has another
deceptively harmful consequence:
overall strength enables debtor nations to rapidly expand their
borrowing at low rates of interest.
In effect, the euro
masks the internal weaknesses of debtor nations running
unsustainable deficits and those whose economies had become
precariously dependent on the housing bubble (Ireland and Spain)
for growth and taxes.
Prior to the euro,
whenever overconsumption and overborrowing began hindering an
import-dependent "consumer" economy, the imbalance was corrected by
an adjustment in the value of the nation's currency.
This currency devaluation
would restore the supply-demand and credit-debt balances between
mercantilist and consumer nations.
Absent the euro today, the Greek drachma would fall in value versus
the German mark, effectively raising the cost of German goods to
Greeks, who would then buy fewer German products.
Greece's trade deficit
would shrink, and lenders would demand higher rates for Greek
government bonds, effectively pressuring the government to reduce
its borrowing and deficit spending.
But now, with all 16 nations locked into a single currency,
devaluing currencies to enable a new equilibrium is impossible.
And it leaves Germany
facing with the unenviable task of bailing out its "customer
nations" - the same ones that exploited the euro's strength to
over-borrow and over-consume.
On the other side,
residents of Greece, Italy, Spain, Portugal and Ireland now face the
unenviable effects of government benefit cuts aimed at realigning
budgets with the productivity of the underlying national economy.
While the media has reported the Greek austerity plan and EU
promises of assistance as a "fix," it's clear that the existing deep
structural imbalances cannot be resolved with such Band-Aids.
Either Germany and its export-surplus neighbors continue bailing out
the Eurozone's importer/debtor consumer nations, or eventually the
weaker nations will default or slide into insolvency.
Germany helped enable the over-borrowing of its profligate neighbors
by buying their government bonds. According to BusinessWeek, German
banks are on the hook for almost $250 billion in the troubled
Eurozone nations' bonds.
Now an inescapable double-bind has emerged for Germany:
If Germany lets its
weaker neighbors default on their sovereign debt, the euro will
be harmed, and German exports within Europe will slide.
But if Germany
becomes the "lender of last resort," then its taxpayers end up
footing the bill.
If public and private
debt in the troubled nations keeps rising at current rates, it's
possible that even mighty Germany may be unable (or unwilling) to
fund an essentially endless bailout.
That would create
pressure within both Germany and the debtor nations to jettison the
single currency as a good idea in theory, but ultimately unworkable
in a 16-nation bloc as diverse as the Eurozone.
Be wary of endless "fixes" to
a structurally doomed system...