Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004. He is now chairman of Flight & Partners Recovery Fund.
By design or accident, Germany is the biggest cause of the economic misery and growing political instability which the Euro is causing in the Eurozone.
Whereas other countries, particularly in Southern Europe, are culturally less competitive than Germany, sharing a currency has inevitably meant that Germany has the export advantage of a cheap currency where Southern Europe has the disadvantages of too strong a currency. Hence no growth in Italy, pain in Spain and Portugal and disaster in Greece.
Where different economies share a currency, it has always been necessary for the more prosperous to make transfer payments to the less prosperous, partially to support political stability and partially to at least provide some cushion to the inevitable economic under-performance of the latter.
Some 30 per cent of US Federal spending goes on transfer payments to the less successful parts of the US. Even within the UK, transfer payments from London and the South East to Scotland, Northern Ireland, Wales, the North East, etc run in aggregate at around £80 billion a year. But Germany’s reply to transfer payments remains “not a Pfennig”.
Germany’s smug response is that the other economies of Europe should make themselves competitive and efficient like Germany. Austerity measures, however, not only produce the problems of not only ballooning unemployment, particularly youth unemployment, but also worsen the debt ratios.
It is particularly surprising that Germany, of all countries, either fails to understand or ignores the lessons of the twentieth century. The over-harsh reparations of the Treaty of Versailles, over which Keynes resigned from helping the UK Government, led to the economic hardship and political instability which accommodated Hitler’s rise to power.
By contrast, the generous terms of the Marshall Plan and debt forgiveness after World War II laid the foundations of Germany’s economic success and political stability. Germany, of all countries, should have realised that the imposition of excessive economic hardship on much of Southern Europe would most likely lead, in due course, to political instability. Thus the election of the Syriza in Greece and the growing political clout of Podemos in Spain should come as no surprise to Germany.
Ironically, the most simple cure to the economic problems caused by the Euro would be for Germany and its related Northern European economies to withdraw from the currency and bring back the Deutschemark, leaving the Euro as a weak currency for Southern Europe and France – in order to help address their lack of competitiveness.
Unless Germany is willing to move, permitting measures in Greece to help revive the economy and potential measures at least to reduce the country’s debt servicing costs, I remain of the view a Grexit and Greek debt repudiation remain likely. It may be that Germany’s fears of this destabilising the Euro will oblige them to give something, but, even if they do, their hard-nosed bargaining position has, at the least, lost them potential goodwill.
Germany needs to understand that as the economically and politically dominant European country, she cannot simply pursue policies in Germany’s own interest – particularly if Germany still espouses a vision of a United States of Europe.