The eurozone can boast a nearly balanced current account compared to the rest of the world. But within the monetary union, huge differences between countries make for a potentially explosive situation.
When one speaks of imbalances, one is often reminded of the notable symbiosis between the United States and China. The Asians sell unbelievable amounts of consumer goods to Americans, and then use those earnings to buy American bonds to finance US debt.
To some extent, Germans are the Chinese among Europeans. In 2011, Germany pulled in a current account surplus of 136 billion euros ($171 billion) - in other words, exported more than it imported. Just under half of that goes to the eurozone, mainly, to the so-called PIIGS - to the heavily indebted European countries Portugal, Italy, Ireland, Greece and Spain - as well as to France.
Responsible for the crisis?
Rolf Langhammer says the euro has rendered certain less flexible
Some experts see such imbalances as a significant reason for the rampant debt crisis. Rolf Langhammer, vice-president of the Kiel Institute for the World Economy (IfW), disagrees. "The imbalances are a reflection of quite varied economic competitiveness," Langhammer said. "We've seen that the Mediterranean countries in the eurozone have enhanced their value."
That means that wages increased dramatically there - a result of the economic boom, which itself was faciliated by low interest rates. "Before the monetary union, interest rates were very high because people feared the countries could depreciate in value," said Jürgen Matthes of the Cologne Institute for Economic Research (IW). And when Italy, Portugal, Greece or Spain depreciated in value, that meant that investors suffered substantial losses in their investments. "The risk of losses was priced into the interest rates," Matthess told DW.
The risk disappeared with accession to the monetary union. Interest rates swiftly dropped for the countries on the eurozone periphery. "This wedding premium was unfortunately consumed in many countries rather than being invested, or the investments did not pan out," economist Langhammer said. Bubbles developed, such as the real estate bubble in Spain.
Under or overvalued?
At the same time, Germany used the Agenda 2010 to turn its social system and employment market upside down. Unions restrained themselves from demanding higher wages. All of that led to a situation in which "within the eurozone, we have countries where the currency is undervalued, such as in Germany, and countries in which the currency is considerably overvalued, such as in Greece and Spain," said Joachim Starbatty, economics professor emeritus in Tübingen. With the advantages of exchange rates and wages in their pockets, the German economy has been able to zoom along - increasing the gap to the rest of the eurozone.
In other words, the euro as a shared currency is not only capable of eliminating the divergences within the monetary union, it's also capable of the opposite: "The fixed monetary parities in the eurozone have surely helped to create greater imbalances within the zone," Matthes told DW.
The euro corset
Before the euro, Greece, Italy and sometimes France, could rely on a tried-and-true method: they would devalue their currency, make their products more attractive price-wise, promote exports, and thus balance imbalances. "The euro took away these countries' possibilities of altering their exchange rates to respond to imbalances," said Langhammer.
So they have had to devalue internally and decrease wages. Even though wages and salaries have been severely cut in Greece in the past few years, a new study by Goldmann Sachs still shows a devalution requirement of an additional 30 percent. Furthermore, Portugal would need to devalue by 35 percent and Spain and France by 20 percent to become roughly as competitive as Germany.
At the same time, structural reforms would have to occur that would go hand-in-hand with the discontinuation of privileges and could all lead to a loss of jobs. Such reforms could be as painful to those affected as wage cuts, and the fruits of such reforms would not yield themselves for a few years to come.
Increased inflation in Germany
So the heat is on Germany to do its part in helping balance out the eurozone and make it less susceptible to crisis. This has partially occured through higher wage agreements. Another step would be higher inflation for Germany. "If Germany were to grow more, then we would see that the German inflation rate most probably would no longer be so markedly below-average, as it has been for a long time," said Matthes.
The German Central Bank is expecting the same thing. High inflation would make German products more expensive and therefore less competitive. Given the desolate economic situation in the balmy countries, German monetary watchdogs will likely also not put pressure on the European Central Bank to increase interest rates.
The European Central Bank finances the imbalances
For the past four years, the European Central Bank has been financing the imbalances within the monetary union following the drying up of private capital for the southern European countries. It buys bonds from insolvent nations and facilitates unlimited liquidity primarily for the banks in the southern countries.
That it cannot be a viable strategy for long can also be seen in the Sino-American symbiosis. While the Chinese continue to export diligently to the United States, they must also witness how their dollar assets are melting away due to the lax monetary policy of the Federal Reserve. Germans will be faced with a similar fate should the eurozone countries drift further apart. "Those who continue to maintain a current account surplus run the risk of having receivables that, in a crucial situation, no longer have value," Langhammer noted.
Author: Danhong Zhang / als
Editor: Neil King