Let us talk today about the German surplus. There it stands, enormous, giving Germany a great sense of achievement and power. No wonder so many Germans want to keep the Euro. They associate it with high levels of exports throughout the EU, and rising cash balances as they seek payment for their goods.
In 2010 Germany exported 179 billion Euros more than it imported. 60% of its exports were to the rest of the EU.
It leads Germans to say to other Euro members, you can be like us. Work as hard as we do, set realistic wages, and you too can have a surplus like ours.
The German surplus is matched by the southern states’ combined deficits. Portugal, Greece, Spain, and Italy had a combined deficit about as large as Germany’s combined surplus. They like Germany do a lot of trade within the EU. They recognise that Germany has become more competitive than them. They want a way to pay for the goods they buy from Germany. They seek loans or grants from the surplus country to pay the bills. Germany is not keen to send them grants, and is trying to restrict the borrowing. The southern states are forced in to austerity measures, to curb their appetite for German products.
In a normal single currency area, backed by a single country, these surpluses and deficits are financed much more easily. If one region of the UK has high unemployment, tax revenues from London and the south-east are collected and sent to pay the benefit bills. If one or more region falls behind, the central government sends it more state cash for local government, for education and health. If one or more region grows slowly, there are regional policies to locate more public sector jobs and to attract more private industry to the troubled area. These do not always work, but the combined impact of the very large sums of money transferred makes it politically tolerable.
If the politicians meeting later this week to “save the Euro” are to have any more success than in the many previous meetings with the same aim, they need to understand this simple characteristic of successful single currencies. Where you have parts of the union that are much more productive and successful than other parts, there needs to be very large transfers to finance the imbalances.