Can’t have a strong Germany without a stable eurozone, and no stable eurozone without a strong Germany
On a recent trip to Germany, I was struck by two distinct narratives. One narrative features a robust German economy with low unemployment, strong finances, and the right competitive position to exploit the most dynamic segments of global demand. The other narrative describes an economy that is encumbered by never-ending European debt crises whose perpetrators seek to shift their responsibility—and their financing needs—onto Germany’s pristine balance sheet.
Both narratives are understandable. But they cannot co-exist forever. After all, it is difficult to be a good house in a deteriorating neighbourhood. Either the neighbourhood improves, or the value of the house declines. And it matters a great deal which narrative prevails—for Germany, for Europe, and for the global economy.
Germany today is reaping the benefits of many years of responsible domestic economic management. In addition to maintaining sound public finances, German leaders implemented difficult structural reforms aimed at improving international competitiveness, including painful labour-market reforms. As a result, Germany is one of the few advanced economies today that has created many jobs and maintained financial stability. In other words, it is the AAA of AAAs.
Yet Germany is also part of a highly challenged neighbourhood, if not its anchor. Its neighbours include countries—most notably on the eurozone’s periphery—that are struggling. They have high overall unemployment (and alarmingly high youth joblessness), and are unable to grow on their own power. In some cases, they also face solvency questions, and are far from achieving the socio-political consensus needed to get their economic houses in order.
To state the obvious, this contrast between Germany and its neighbourhood is very awkward. It fuels endless internal and external tensions, encourages finger pointing, and promotes a loud and disruptive blame game. And all of this distracts attention from the need to compete in a rapidly changing global economy.
The longer all of this persists, the more it tears at the fabric of European unity. Accordingly, European officials need to continue to make steadfast progress in three major areas:
* Improve individual countries’ domestic policy mix in a manner that targets debt sustainability through both growth promotion and deficit reduction, especially in the most vulnerable peripheral economies;
* Enhance the eurozone’s internal financial circuit breakers to reduce the risk of disruptive financial feedback loops and destabilising multiple equilibria; and
* Strengthen the eurozone’s institutional underpinnings, as well as its mechanisms