The region by region assessment of the impact of the Global Minotaur’s demise post-2008 continues in today’s post with a close look at Germany and its attempt to remould Europe in its image. (The last posts looked at developments in the triangular relationship between Japan, East Asia and the USA).
It is now appropriate to turn to the Global Plan‘s second pillar: Germany and its mixed fortunes during the Age of the Minotaur, and beyond. The difference with Japan was this: In trying to shield its own export-led growth from the post-1971 dollar devaluation, Germany had something that Japan lacked: access to its own vital space; a space that the United States had previously laboured so hard to create on Germany’s behalf: the European Common Market, i.e. today’s European Union (EU). The role of German exports to the rest of Europe remained that which the Global Plan‘s American architects had envisioned: To support a strong Deutschmark and, at the same time, to play a central role in the industrial development of the rest of Europe. Indeed, German exports were not just Volkswagens and refrigerators but also capital goods essential for the normal functioning of every aspect of Europe’s productive apparatus.
Nevertheless, Germany was not Europe’s locomotive. From 1973 onwards, the developmental model of continental Europe has been resting on the combined effect of maintaining a powerful capital goods industry, linked through Germany’s global corporations. However, the overall demand that keeps these corporations going was always scarcer in their home countries, than in their neighbours. Like Japan, Germany too showed a magnificent capacity efficiently to produce the most desirable and innovative industrial products. Equally, it too failed miserably to generate endogenously the requisite demand for them. But, unlike Japan, Germany had the advantage of its European periphery, or vital space, which provided a significant portion of demand for its industrial output thus making Germany less dependent (relatively to Japan) on the Minotaur.
Much ink has been expended in recent years to discuss Europe’s fundamental heterogeneity. But how could it be otherwise? Is the dollar zone homogenous? Does Germany itself consist of equally developed and dynamic Länder? Of course not. Broadly speaking, the EU comprises three different species of economy: Persistent surplus generating countries (Germany, Holland, the Flemish part of Belgium, Austria and Scandinavia), persistent deficit inducing countries (Italy, Greece, Spain and Portugal), and… France, a country in a category of its own.[1] The reason France is an outlier has to do with the fact that, while it consistently fails to join the group of surplus nations, it nevertheless enjoys two major strengths: First, the calibre of its political institutions which (perhaps due to its Napoleonic past) were the nearest Europe got to a policy making civil service that might rival that of Washington. Secondly, France sports a large banking sector which is more advanced than that of the surplus countries. Because of the gravitas of its banks, France achieved a central position in the facilitation of trade and capital flows within the European economy.
From 1985 onwards the Global Minotaur‘s drive to expand the American trade deficit translated into a major improvement in Germany’s trade balance. This rubbed off on the rest of the EU, which saw its collective trade position go into surplus. This was the environment in which the forces that would create the common currency, the euro, gathered pace. Each grouping had different reasons for wanting to a currency link up.
From the 1970s onwards, Germany was keen to shore up its position in the European scheme of things, as a net major exporter of both consumption and capital goods and a net importer of… overall demand. Key to its success was the policy of keeping its growth rate below that of the rest of Europe while, at the same time, maintaining investment at a much higher level than that of its neighbours. The aim of this policy was simple: To accumulate more and more trade surpluses from within its European vital space in order to feed the Minotaur across the Atlantic so as, in turn, to financialise its own export expansion within the United States and, later, China.
The one spanner in the works of this German Strategy was the threat of competitive currency devaluations that Italy and other countries were using with good effect to limit its trade deficits vis-à-vis Germany. The idea of a monetary system to limit currency fluctuations proved a major motive for Germany’s acquiescence to the idea of giving up its cherished Deutschmark. But when the European Exchange Rate Mechanism, that was set up to limit intra-European currency fluctuations, collapsed after a speculative attack in the 1990s, Germany opted for Plan B: A common currency that would stop the speculators from speculating against the range of currency fluctuations.
The rest of the Europeans each had their own reasons for wanting a common currency. The elites in the deficit countries had grown particularly tired of devaluations. Plain and simple. The fact that the Deutschmark value of their bank accounts and beautiful summer villas was liable for large and unexpected falls weighed heavily upon them. And as their working classes were also tired to watch inflation eat into their hard won wage rises, the Greek and Italian elites found it easy to convince them to share the dream of a common currency. Of course, there was a hefty price to pay: To lower inflation to the 3% limit that was a prerequisite for entering the eurozone, deficit countries had to induce effective stagnation in the productive sectors of their own economy. The shortfall in wage income was, nevertheless, ameliorated by the rise in lending which was made cheaper as interest rates fell. Just like in the United States in the 1970s and 1980s working people were forced to accept lower real wages in return for shiny credit cards, similarly in Europe’s deficit countries the underprivileged were forced to take on more debt.
However, the key to the euro project was none other than Europe’s glorious outlier: France! France’s elite had three reasons for seeking a lock up between the Frank and the Deutschmark: First, it would strengthen the political elite’s bargaining position vis-à-vis the powerful French trades unions, in view of the moderate wage rises across the Rhine that German trades unions negotiated with employers and the Federal government. Secondly, it would shore up its, already important, banking sector. And thirdly it would enable its political elites an opportunity to dominate Europe in the one realm where French expertise was well advanced compared to its German counterpart: the construction of transnational political institutions.
The Deutschmark’s new clothes
The formation of the euro engendered deepening stagnation in the deficit countries plus France. It also enabled Germany and the surplus eurozone nations to achieve exceptional surpluses. They became the financial means by which German corporations internationalised their activities in the United States, China and Eastern Europe. Thus Germany and the other surplus countries became the Global Minotaur‘s European opposite; its Simulacrum:[2] As the Minotaur was creating demand for the rest of the world, the Simulacrum was draining the rest of Europe of it. It maintained Germany’s global dynamism by exporting stagnation into its own European backyard.
At the aggregate level, the eurozone was making good progress. Total incomes were rising but, underneath the surface, the industrial sectors of France and the deficit countries entered into a slow burning recession. It was the price stragglers and ambitious France had to pay for hooking their currencies up to the Deutschmark. Their reward? Cheaper loans and debt-driven consumerism.
Before the Crash of 2008, Europe’s Minotaur envy[3] manifested itself in long treatises on the sluggishness of continental growth and the superiority of the Anglo-celtic model. In reality, the lethargic European growth rates, which did decline during every single one of the last four decades, had nothing to do with inflexible labour markets, an arthritic financial system, or over-generous social security. They were due, simply, to the way in which most of Europe was falling under the spell of German surpluses. The only relief Europe’s deficit countries received, during the Global Minotaur‘s halcyon days, came from net exports to the United States. But when 2008 struck, even that silver lining vanished.[4]
The institutional guise of the Simulacrum came in the form of the famous Maastricht Treaty which set up the rules governing eurozone membership. It stipulated budget deficits for member states capped at 3% of GDP, Debt-to-GDP ratios below 60%, monetary policy that was be decided upon and implemented by an ‘independent’ inflation-busting European Central Bank (the ECB) and, last but not least, a no transfers clause (or no ‘bail outs’, in post-2008 parlance). The latter meant that, if members states ever got into fiscal trouble, they should expect no assistance from the euro’s institutions (ECB, Eurogroup etc.) or from fellow eurozone members.
The Maastricht Treaty was sold to the European public and elites as reasonable measures for shielding the euro from free riding. The metaphor most often used was that of a joint bank account from which each account holder can withdraw money independently of contribution and without prior agreement. Such an account would soon be depleted, the story went. The equivalent for the eurozone would be member state profligacy that undermines the common currency’s credibility and value.
Although a mechanism preventing such free riding is necessary for any currency union, it is certainly not sufficient. Something was missing. Was that ‘something’ left out accidentally, or was there a hidden agenda? I think the latter. In fact, it was the same agenda that lay behind Harry Dexter White’s rejection of Keynes’ International Currency Union (ICU) proposal at Bretton Woods, in 1944.[5] Just like the Americans insisted on preserving their right to run large surpluses under the Global Plan, so did Germany demand that the Maastricht Treaty would not include any explicit Surplus Recycling Mechanism (SRM). The objective? To use the creation of the eurozone as a mechanism by which to cast in stone the ‘obligation’ of the deficit countries (plus France) to provide Germany with net effective demand for its exports.
The great difference between American hegemony worldwide and German dominance within the EU was that the United States understood well the importance of recycling surpluses. The Americans’ only difference with Keynes was that they did not want the SRM to be formally instituted. So, under the Global Plan, they made a habit of supporting Germany and Japan with generous capital injections. And when the Global Plan died an ignominious death, the Global Minotaur that took over recycled with glee, albeit by reversing the flows of capital and trade surpluses in favour of Wall Street. As long at that ecumenical beast kept going, the eurozone’s faulty architecture held on.
When the Crash of 2008 wounded the Minotaur, the euro cracked. Greece was its weakest link but the problem was deeply ingrained in the whole design and, in particular, the lack of an SRM. But before saying more on this, it is best to take a few steps back, to the moment the two post-war Germanies became one.
Europa’s flight
It is tempting to stretch this book’s central metaphor to include the myth of Europe. According to the same mythology that gave us the Minotaur, Europa was a fair Phoenician Princess that Zeus took a fancy to. Metamorphosised into a white bull, he lured her into riding him and, before she got a chance to jump off, he dashed into the Aegean and carried her to Crete. King Minos was the product of that union. Which makes Europa the Minotaur‘s step-grandma.[6]
Another wrinkle to this story is that, before returning to Hera, Zeus bestowed certain gifts upon Europa. One of these gifts was Laelaps, a hound that always caught its prey. (Another was a javelin that never missed its target.) Some generations later, Laelaps was enlisted to the task of hunting down the Teumessian fox; a fearsome animal designed by the gods never to be caught. The impossibility of the match between Laelaps and the Teumessian fox taxed Zeus’ mind so much that he decided to turn them both into stone and cast them upon the night’s sky. While wrecking their brains in search of policy fixes to the euro’s troubles, Europe’s policymakers may be amused to recall this metaphor for impossible tasks.
German Reunification and its global significance
The collapse of the Soviet Union, that began unexpectedly around 1989, soon led to the demolition of the Berlin Wall. Chancellor Helmut Kohl moved quickly to seize this opportunity to annex East Germany. Conventional wisdom has it that the inordinate cost of Germany’s reunification is responsible for the country’s economic ills and its stagnation in the 1990s. This is not my reading.
While it is undoubtedly true that reunification strained Germany’s public finances (to the tune of approximately $1.3 billion), and even led it to flout the very Maastricht Treaty that it had insisted upon, reunification helped reduce German labour’s bargaining power. What the oil crises, Wal Mart and some aggressive corporate moves had achieved in the United States in the 1970s, reunification brought to Germany in the 1990s. It is also worth noting that East Germany was not the only part of the former Soviet empire whose collapse boosted German capital. From Poland to Slovakia and from Hungary to the Ukraine, dirt cheap labour became available to German companies.
More generally, Germany’s response to the cost blowout of reunification was the pursuit of competitive wage deflation. Indeed, while the eurozone was being prepared, Germany, courtesy of reunification, was locking into its labour markets substantially decreased wages (in relation to the wages elsewhere in the eurozone). Almost in a bid to copy the Global Minotaur‘s domestic strategy, the German Simulacrum promoted a strategy of restraining wage growth to a rate much below productivity growth. Once the euro was introduced, and German industry was shielded from the competitive currency depreciation of countries like Italy, its gains from the fall in wages became permanent.
Additionally, Germany’s system of collective wage bargaining, based on a corporatist-cum-neo-mercantilist entente between German capital and the German trades unions, enabled the gap between productivity and wage growth to be more favourable to capital compared to the rest of Europe. The gist of the matter was low growth reinforcing German export competitiveness on the back of continual real wage deflation and vigorous investment. As the Global Minotaur began to soar, after 2004, Germany’s trade surplus took off in sympathy, capital accumulation rose, unemployment fell to two million (after having risen to almost double that) and German corporate profits rose by 37%.
However, even though the picture seemed quite rosy for the German elites, something rotten was taking over its banking sector; a nasty virus that the Minotaur Simulacrum had wilfully contracted from the Global Minotaur itself. And when the Crash of 2008 happened in New York and London, that virus was energised in earnest.[7] It was to become the beginning of the euro’s existentialist crisis.
[1] I leave Britain outside this taxonomy. Following its deindustrialisation, under the Thatcher government, the only thing standing between Britain and Europe’s stragglers is the City of London with its pivotal position in the world of finance. Ireland is also excluded because it is currently undergoing a crisis that may well alter its status quite fundamentally.
[2] French philosopher Gilles Deleuze defines a simulacrum as a ‘system’ “…in which different relates to different by means of difference itself”. See his Difference and Repetition. Columbia University Press, 1968.
[3] Recall the introduction to Chapter 5.
[4] At a time when Europe’s deficit nations and France had to reckon also with growing deficits with Asia.
[5] That discussion was presented in Chapter 3.
[6] For the Minotaur‘s birth story, return to Chapter 1.
[7] IKB Bank, and its parent bank KfW, were the first to have been burnt by Wall Street scams that exploded in 2008. They ran to Berlin for government assistance. The bill came to €1.5 billion. It was the tip of the iceberg. The Global Minotaur, unbeknownst to the German people, and to most of its politicians, had infected German capital with the virus of financialisation. When that disease became fully blown, the German taxpayer had to foot an enormous bill.
