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For a generation of German politicians, "Europe" has been a way of slaying the ghosts of the past. This may be understandable, even honourable, but the results have not always been good for Germany or Europe. Chancellor Helmut Kohl overrode the Bundesbank (and the majority of Germans) in the name of "Europe" when the euro replaced the deutschmark. After barely a decade, Economic and Monetary Union (EMU) is facing its biggest crisis and Germany is again under pressure to come to the rescue, in the name of Europe. 

In fact, in this instance, the interests of Germany and Europe are the same: Germany should leave the euro.

The nature of this crisis is still not widely understood. The central issue is not one of public finance, though Greece and several other countries have been profligate. The main issue is what happens when competitiveness is lost and how it can be regained inside a monetary union. In essence, what is being proposed for Greece is two-thirds of a "traditional" IMF package — cuts in expenditure and increased taxes — without the third: currency depreciation.

In EMU, a so-called "internal depreciation" has to replace currency depreciation, but given the predicament of Greece (and several other countries) this is a misleadingly polite phrase for "debt deflation".

The programme being recommended to Greece and the rest will crush output and increase unemployment and private sector defaults, further reducing government revenues and making public sector default and national bankruptcy more likely.

 Some people in Germany seem to think that if only other countries were like Germany, everything would be fine. By definition not every country can have a trade surplus and when Germany regained its own lost competitiveness (which was far less serious than that of Greece, Spain and the others today) in the late 1990s and early Noughties, it was not only through its own efforts but also at the expense of others.

At the time, the ECB set interest rates very low to help Germany. The consequent weakness of the euro assisted its exports in non-EMU countries, but the rates were too low for a number of other countries including Greece, Spain and Portugal where this led to accelerating inflation, which benefited Germany's price competitiveness and set off a credit boom, increasing demand for German goods elsewhere in EMU. Despite this, in 2005, Germany had to be "pardoned" by the EU's Economic and Financial Affairs Council (Ecofin) for missing targets.

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May 18th, 2011
2:05 PM
Brilliant article, many thanks. Dr Stuart is one of the very few MPs who treats fact and truth as first order issues rather than material for spin. Do look at her speech in Hansard on the EU Draft Budget, and Justine Greening's feeble, desperately feeble, response. Ms Stuart: ' Can the minister tell us whether a vote on this matter either way would make the slightest bit of difference?' Ms Greening said she would 'pressing the case' for UK budget cuts' - but now we face a 4.5% increase, and Osborne is paying up. Gisela Stuart deserves our thanks for sticking to honesty as a primary virtue in public politics.

Chris Gillibrand
June 28th, 2010
8:06 PM
That should be "Auf nimmer Wiedersehen"- goodbye and get lost (literally to never seeing you again), rather not even a goodbye, rather an adieu.

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