I have no spur
To prick the sides of my intent, but only
Vaulting ambition, which o'erleaps itself,
And falls on th'other. . . .
- Macbeth Act 1, scene 7. 25–28
To argue the Eurozone is a two-tier system is to simply restate the obvious. Germany is still coasting along nicely, sucking the remaining wind out of the rest of the pack, all the while seeming to be the financial savior. Some say Germany is attempting financially what it wasn’t able to achieve militarily—complete dominance of Europe. Maybe that’s a bit of hyperbole, but maybe its not.
The following interesting and provocative comments, which I believe are quite accurate, are from William H. Overholt, a Senior Research Fellow at the Ash Center of Harvard’s Kennedy School (Winter 2012 edition of The International Economy magazine):
“When the global financial crisis began, the world could be saved by depression only by massive fiscal stimulus. Because of the size and global engagement, three countries bore responsibility for saving the global economy: the United States, China and Germany. The United States and China acted decisively and averted depression. Germany stood aside and profited as a parasite on the US and particularly Chinese stimulus.
“…As Europe struggles to avoid collapse of the southern European economies and the Franco-German banks, Germany sought to paint its own role as virtuous and the Greek/Portuguese/Spanish/Italian role as debauched in order to justify forcing most of the costs onto the southern Europeans. Greeks should, according to this logic, bear almost the whole burden of sacrifice while the German companies and banks who profited for decades from an unfair currency structure and predatory lending should pay minimally.
“It won’t work. The burden on Greece and others is too great for them to bear. By worsening, rather than ameliorating southern depression, Germany ensures those countries failure. Squeezing Greece the way the allies squeezed Germany after 1918 can only lead to the fracturing of Europe.
“…Germany is exploiting the euro crisis to impose on Europe a system that will be structured by German rules and dominated by German power.”
Others see it the same way it seems. This is from Criton Zoakos, at Leto Research:
“A collapse of Germany’s export markets in the Eurozone’s periphery has posed a challenge to its commitment to remain the world’s pre-eminent advanced exporting nation. Germany is meeting this challenge in a twofold way: it is making great efforts to develop new markets for its exports among the BRICS, and it is pushing hard to convert the Eurozone periphery from export markets into sources of large amounts of cheap labor. If the BRICS are the future destination of German exports, the PIIGS trapped in the Eurozone will ensure competitive labor costs and a competitive Euro exchange rate.”
There are major problems with Germany’s grand strategy to grow as the world’s premiere export nation; here are a few:
1) The global demand dynamics have changed considerably as the private sector de-leveraging continues in earnest (i.e. thanks to the balance sheet recession in the US particularly).
2) There may not be enough demand from the BRICS, as they fight for similar portions of the export pie given their export models, in the same vein as Germany.
3) The US and China know the game Germany is playing and will not play the role of patsy as the weak states in the Eurozone have been forced to play.
4) Germany underestimates US capabilities at its own peril. Expecting a straight-line US decline is a big mistake, I believe, given the rising angst amongst US citizens and voters. A few major policy change dynamics, in terms of either defense policy, i.e. forcing NATO to start paying for itself (which means Germany), or a new US industrial policy that allows US corporations to bring home cash and provide siginificant incentives to build domestically, could change the balance of competition quickly.
5) And a brilliant point from Mr. Zoakos as it relates to the where real sustained growth flows; it is not about exporting of existing supply of goods:
“As a rule, sustainable growth originates in the supply of new, innovative goods and services provided by entrepreneurial activity – the type of supply that creates ex nihilo its own demand. There was zero demand for telephones before Alexander Bell invented them. There was zero demand for personal computers before the creation of the first PC with a workable operating system, and so forth. Supply of pre-existing goods and services does not stimulate growth once it has satisfied market demand: Once the supply and demand curves intersect, the marginal rate of profit in the given industry reaches zero, meaning that the given industry stops contributing to macroeconomic growth.”
So far, not even the US government has been able to destroy the innovativeness of most American entrepreneurs. The US was declared dead on arrival—heading into decline, once before by a major world export power; it was Japan at the time (as Germany and China are declaring the same now).
I remember vividly a story I read in The Wall Street Journal, it was back in 1986-87 range. At the time, you may remember, Japan was about to swallow up the globe. It was the world’s second-largest economy and destined to become number one, racing past the US, we were told by those great seers back then a la the usual gang of simplistic regression analysis-thinkers so common among our top global financial types. Mr. Japanese Finance Minister (or Foreign Minister) said: “Europe will become our boutique and America will become our farm.” Oops! That didn’t seem to work out so well now did it?
Germany seems increasingly hubris-filled as the outline of its next grand strategy for total European control seems to be heading toward fruition. But once again, I believe its plans will be thwarted, as many PIIGS captives inside Europe and those with out interests outside are on to the game.
Happy Friday. Have a great weekend.