Why Germany is as much cause of crisis as Greece

Global economics has a strange binary logic of heroes and villains. We worship the countries with riches and surpluses, and disdain those with excess borrowings and budget deficits. We eulogise countries with strong, macho currencies, and despise those with weak, wimpish ones.

The truth, however, lies somewhere in between. Surpluses and deficits are actually mirror images of each other. Just as you cannot borrow without someone to lend to you, it takes two (or more) to lend and borrow. If you borrow unwisely and ruin yourself, it is only because there is someone who is lending unwisely and pretends he is god.

Let’s illustrate this with an example: If the Swiss franc is appreciating and the euro falling, does it mean Switzerland is doing something right and the eurozone something wrong? Actually, it means both are doing something wrong. The Swiss have to do something to depreciate their currency, and the eurozone something to strengthen the euro. If Europe has to tighten its belt, the Swiss must loosen them. If both don’t work at it jointly, the outcome can only be skewed.

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The Greek arrow that has been shot at the heart of the eurozone’s “rescue package” will destroy the half-false story that the Americans and the European PIIGS (Portugal, Ireland, Italy, Greece and Spain) are the villains in the current global economic crisis because they have been living beyond their means while the Germans and Chinese are saints because they are virtuous savers and investors.

[caption id=“attachment_121300” align=“alignleft” width=“380” caption=“Attempts are now being made to paint Greece as the villain, but the truth is the Germans are greater villains. Louisa Gouliamaki/AFP”]  [/caption]

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The markets are tumbling all over because Greek Prime Minister George Papandreou has announced that he will hold a referendum to endorse the extreme austerity package proposed by the stingy Germans to throw them a rescue line. The referendum will effectively kill the package, for two reasons. By the time it is held it will be a couple of months. Europe cannot wait for so long to get its house in order. Moreover, the chances are the Greeks will reject unending austerity. This is why the markets look at the referendum with horror.

Attempts are now being made to paint Greece as the villain, but the truth is the Germans are greater villains. They seem to have learnt nothing from their own travails between the two world wars - and are now doing enormous damage.

Between the two world wars, Germany was overburdened with World War I reparations, and hyperinflation. Despite this, Germany wants to burden Greece with the kind of austerity that it itself revolted against. The unemployment and hyperinflation of the 1930s gave rise to Hitler. Does Germany want a new form of intolerance to rise in Greece and the other PIIGS?

Germany’s second sin is that it is trying to think in narrow nationalistic terms (we have to protect our banks, our markets) instead of manfully shouldering its wider responsibilities to the eurozone. After all, it is the biggest beneficiary of the euro project.

If you don’t believe this, one set of figures should explain why: even as total unemployment in the eurozone crosses double-digits (it’s over 16 percent in Greece and over 21 percent in Spain), Germany’s unemployment has fallen below 6 percent. So who has gained most from the euro?

If we accept that Germany is the prime beneficiary of the euro (over half its exports go to the eurozone), it has to carry the can for rescuing the currency and the zone, not Greece or the rest of the PIIGS. Normal human logic says the strong must protect the weak - not the other way around. But Germany has unfairly put the burden on the hapless Greeks - and is now facing the prospect of a disorderly default or Greek crashout from the eurozone.

The same applies to China (and Japan, to a lesser extent) - the world’s biggest holders of surplus dollars. If the US has been living beyond its means, it is because China has been lending it money - and this is well known. And China lent it money because it wanted to export more. It did over the last two decades (1990-2010) what the Japanese did in the 30 years before that during (1960-1990). It has salted away $3.2 trillion dollars in foreign exchange surpluses, and it is time to spend it.

The solution to the world’s problem lies equally between austerity by the over-borrowers and over-spenders and spending by the world’s over-savers and exporters. The burden of adjustment cannot be borne just by the weaker economies.

As Ambrose Evans-Pritchard writes in The Telegraph: “The Greek referendum… has left officials in Paris, Berlin and Brussels speechless with rage…but at least the Greeks are stripping away the self-serving claims of the creditor-states that their ‘rescue’ loan packages are to “save Greece”. They are nothing of the sort. Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state without any offsetting monetary stimulus or devaluation”

Ditto for China. The US economy (or, for that matter, the European or Indian economies) cannot move towards better budgetary and external balances without an appreciation of the Chinese yuan and compensating Chinese investment in eurozone bonds and the US and Indian economies. It also has to buy more from the world. Ditto for the Japanese. The trillions of dollars they have salted away will turn to dust if they are not invested in deficit nations - including India, which imports twice as much as it exports to China.

The key to solving the global economic crises lies with Germany, China and Japan sharing the bulk of the pains of adjustment.

If they don’t, Germany and China - the two big exporters to the eurozone and the world - should be seen as the new axis of economic evil. Both helped create the US and eurozone crises by lending unwise money to their importers (the US and the rest of the eurozone), and thus helped create the crisis.

It is their job to solve it.