What’s driving Germany’s hardline stance on Greece?

By Juan Torres López*

This article was published first in the portuguese newspaper El Publico. We are reproducing its English version as it was published by InsideOut Borders. 

The truth is, however, that Greece has fulfilled to the letter the dictates of the troika but they have proven to be a complete failure in the recovery of the economy, reducing debt and improving the lives of people. The failed Troika policies justifies starting again in a different fashion.

Furthermore, what the new government is proposing is merely to try to find ways to cope with these problems more effectively and not to be deaf to previous commitments but rethink them. And to this one must add what Greece needs to succeed –  a quantity of resources or generosity from others that is currently subpar when compared to that devoted so far to banks or even the more prosperous economies like Germany.

So much so that even someone like President Obama – who could hardly be suspected of nurturing sympathies for Syriza – has said that it would be reasonable not to pressure Greece so much and help it return to growth so it can get out of its situation.

The changing Germany economy

In order to understand the intransigence of Mrs. Merkel and her allies one should not to look at Greece but at Germany and more specifically what is precisely what has been happening with the economy in recent times.

Europeans are often unaware that Germany is not a partner, a kind of larger and more powerful elder brother. No. Germany is much more than that. Germany is the fourth world power after the United States, Japan and China, and, above all, is the second largest exporter in the world economy. That is, it is a huge economy, forced to think primarily about its own interests, and so, its needs in foreign markets, which means all of Germany’s strategies are subordinate to enjoying a strong position in the environment in which it operates.

In the last ten years, almost half of the growth of its economy has depended on net exports. So I think one has to look at the nature of the German economy to find the reason for the intransigence with which it has been imposing its interests in the European Union and now against Greece.

Factors influencing Germany’s strategy

In that sense, there are three factors that are today decisively influencing the German strategy.

1. Global trade is suffering heavily and it is not just cyclical in nature. According to a recent study by economists at the IMF and World Bank (Slow trade), in 2012-2013 it grew less than half than in the previous 20 years and below the growth in the world economy in general, which had not happened in the last four decades. That means that in the coming years exporting economies, such as Germany, will have great difficulties achieving the same growth rates as they did in previous periods.

2. Keep in mind that the destination of German exports has been changing in recent years. In 1990, 50% went to countries which now form the euro area and in 2014 only 40%. The average annual growth in exports to the eurozone since 2000 (4.5%) is just half the increase of those to other areas such as Central Europe (9%) and Asia (10%). Germany, therefore, is beginning to have other preferred partners.

3. We must also consider that the internal situation of the German economy itself is changing. An article published last December by the research department of the National Bank of Paris (BNP) Paribas (Inflexible Allemagne) showed that, in addition to future problems caused by the fall in international trade, Germany is faced with two major internal challenges. First, the growing aging population – Germany has become the second ‘oldest’ country in the world after Japan measured by the percentage of population over 65 years (21%) – certainly in part by making it very difficult for women to combine motherhood and career development. This is something that can result in a very sharp drop in the rate of domestic savings in the coming years, among other things.

In addition, Germany has been neglected in recent years: private domestic investment has dropped 7 points in the last 20 years and investment in public infrastructure is 30% lower than the OECD average, which in this day and age creates in some very significant  shortcomings. According to the study of BNP Paribas, the cumulative gap in 1999-2012 between the actual and optimal rate of investment was 40% of GDP.  Having spent the surplus obtained in recent decades on foreign investment – largely to finance speculative bubbles in other countries – it has neglected domestic income, which has also caused the poverty rate to reach a new record, in 2013: 16.1% of the total population, 69% of the unemployed, 35.2% of single parent and 5.7% of children.

So the future for Germany is not so rosy, it will not find it so easy to obtain external surpluses, its commercial interest will cease to be as a partner within the euro – to which it seems to have already squeezed out all possible benefit  – and it will have to devote much more attention than hitherto to its own problems and the demands of domestic investment.

New German-led axis emerging

Germany will not take the initiative to break the status quo of the euro because that would look like a full-blown assault on the European project. But it will impose more rigidly than ever the conditions on other member states it no longer considers partners with which is shares interests. And it will not mind thus tightening the noose until there is no any alternative but to surrender or opt out of the euro.

Germany is already looking hard at a new European axis with France and Poland. That’s why Eurozone countries Greece, Spain, Portugal, Cyprus and even Italy should no longer expect the good times.

The sensible thing would be that they all begin to ask whether they are content to be silent witnesses or simple extras in this real life drama of a euro designed for Germany – or if they have more in common than just the fact of being despised by this great power.

*Professor of Applied Economics at the University of Seville. Author of numerous books and scientific papers including: Los amos del mundo (The masters of the world); Las armas del terrorismo financiero (Weapons of financial terrorism);  Lo que debes saber para que no te roben la pensión (What you should know so they don’t steal your pension, co-written by Vicenç Navarro), and the latest edition of Economía Política, un conocido manual de introducción a la economía (Political Economy, a well-known manual of introduction to economics). Juan Torres López’s  website is Ganas de Escribir.