The German Blueprint of European Disaster

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Picture: aurore.asso.frBy Julio Godoy

BERLIN - Throughout the 1990s, the German economic elite, supported by the conservative government of Helmut Kohl, and especially by the German central bank, the formidable Bundesbank, practised the policy of rigorous social adjustment to increase the country's international competitiveness. The cornerstone of this policy was the artificial appreciation of the German currency, the Deutsche mark (D-Mark), deliberately triggered by the Bundesbank's policy of high interest rates, allegedly to halt inflation.

This policy of high interest rates and the ensuing appreciation of the D-Mark created artificial costs for the local industry, which was forced to increase its productivity, especially by reducing labour costs. The first consequence was higher unemployment and lower salaries and social doleouts for workers. The second consequence was a substantial reduction of domestic demand, and an increase of poverty.

This was the real objective of the Bundesbank policy: to facilitate the economic elite's plan to freeze salaries, to cut back the social welfare state, and in general, to consolidate the reign of neoliberalism in the country's economy.

The meek attempts by unions and other workers' groups to propose alternative policies failed: whenever their plans faced opposition, the economic elite, the Bundesbank, and the government agitated the phantoms of unemployment and of deindustrialisation of the country.

Their main argument was that economic globalisation and the increased competitiveness from emerging developing countries, especially in South East Asia, would not give Germany other alternative than to tighten the belts. In this context of increased competition, so the official argument, the welfare state had become a costly luxury that the country could no longer afford.

When Helmut Kohl was voted out of office in 1998, and a coalition of Social Democrats and Greens overtook the government, some naïve observers believed that these policies would be supplanted, along the a more traditional leftist, continental European tradition. Those expectations were soon proved to be unfounded – the government of Gerhard Schroeder and his opportunist ally Joseph Fischer strangled even more the middle and lower classes, by reducing unemployment and other social allocations, by creating a very low-paid labour market, and by reducing the social costs of entrepreneurs, always following the argument outlined above.

The scheme worked. Germany is today Europe's undisputed power house, and one of the leading economies in the world. German industrial goods – from consumer goods to industrial equipment – inundate the world markets, from the People's Republic of China to Brazil, from South Africa to Mexico. This success gives apparent legitimacy to the German pretention to lead Europe, and to impose its own economic and social programme on other European countries, especially across the Euro zone, in countries such as Greece, Portugal, Spain, and even Italy and France, plagued by the sovereign debt crisis.

Two important considerations

However, this reading of the recent German economic history leaves aside two important considerations. One is related to social justice within the country. The second refers to inherent contradictions between the European market rationale, and the demand imposed upon countries affected by the debt crisis.

On the one hand, not all belts were tightened – only those of people dependent on salaries and welfare state services. Germany paid its apparent economic success with a disruption of the social equilibrium that characterised the country since the birth of the German federal republic in 1949 – that is, with increasing poverty among wide ranges of the country's population, and by decreasing the quality of social and economic chances for its younger generations.

Numerous studies prove that the accumulation of wealth skyrocketed since the mid 1990s, and has not stopped to increase ever since. Between 2002 and 2008, the country's total wealth increased by more than seven percent in real terms – it went up by the unimaginable amount of 1,100 million Euros! In the same period, however, poverty also increased.

Some one third of the population – that is, some 25 million people – possess no wealth at all, no savings, no real estate, nothing. They take home only a small income, which allows them just to survive. Meanwhile, the top ten percent of the population owns more than 60 percent of that wealth. The dense concentration of wealth is even more marked at the top one percent of the population.

Another clear illustration of the social consequences of the appreciation of the D-Mark is the evolution of salaries since the mid 1980 – in real terms, they are lower today than 25 years ago. That is, middle and lower classes today have at their disposal today a lower purchasing power than one generation ago. Furthermore, costs for education have increased, in the form of fees at public universities and other institutions, or of reduction of services at public schools, libraries, and the like.

No wonder then that in most university and technical schools students today belong to upper and upper middle class households. For the children of the poor, education is no longer available, or of such poor quality, that it does no longer represents the social mobility factor it used to until the late 1970s.

But these policies are not the only factor that allowed Germany to remain the industrial leading nation it is today. The introduction of the Euro ten years as common currency in 17 countries in Europe was equally important – more than 60 percent of Germany's total exports go to a Euro country.

For Germany, the Euro had the same effects as of currency devaluation – by reducing relative costs, the Euro let the German exports to partner countries boom. However, this wouldn't have been possible if those countries would have carried out a similar policy as in Germany – one of chocking the local demand, and strangling consumption, as Germany has been doing for the past 20 years. That is, without the disposition to consume German goods that prevailed in Greece, Spain, Portugal, France, and Italy throughout the past decade, the German expansion wouldn't have been possible. In other words: The sovereign debt in the European Mediterranean area is the other side of the boom in German exports.

Debt crisis

Since the outbreak of the debt crisis in Europe, the German conservative government of Angela Merkel, in coalition with the usual suspects at the International Monetary Fund, and the international financial markets, has forced a drastic policy of austerity and so called internal devaluation – that is, mass unemployment, cuts in salaries, social allocations, and the like – in Greece, Portugal, Spain, Italy, and France. In some countries, this global coalition has even forced elected governments – albeit inept and/or corrupt ones – out of office, as in Greece and in Italy, and imposed new illegitimate regimes of ideological allied technocrats. Merkel is also supporting the incoherent, corrupt government of Nicolas Sarkozy in France, in an effort to improve the latter's slight chances to be re-elected president next April.

An example suffices to illustrate the incoherencies of present economic and fiscal policies in Europe. Apparently to increase state revenues, Sarkozy has announced that his government will increase the value added tax – a tax that sanctions consumption. At the same time, the government will marginally reduce the social costs of labour paid for by employers.

The results of the second measure will at best be negligible – the cost reductions will be so marginal that no new investment is likely to occur as consequence. But the first measure will further choke consumption, of French and of European goods, precisely at a time when demand should be supported, and not strangled. But who cares about coherence, if the real goal is to further impoverish the have-nots, and benefit the immediate friends and allies?

No wonder then that the European austerity plan has failed to work. It has actually pushed Greece, Spain, Portugal, Italy, and France deeper into recession, impoverished large chunks of the population. The plan has in fact put Greece at the brink of a civil war. In France, Portugal, and Spain the social crisis could not be more evident – in Paris, so called marches de misere, or markets of misery, where scavengers sell and buy debris to and from the poorest people, have mushroomed during the last couple of years. The youth unemployment in Spain has reached world records – and the prospects couldn't be bleaker.

Moreover, the austerity plan measures, applied in countries already suffering from deep recession, are simply irresponsible. You don't need to hold a doctor's degree in economics to understand that it is exceptionally counterproductive to try to improve the state revenues by strangling economic activity during a downward business spiral.

And: if Greeks, Spaniards, Portuguese, French and Italian citizens no longer consume, who will buy the German industrial products? Questions like these may sound rhetorical but they are of utmost significance, questions which Angela Merkel and her allies refuse to answer.

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