Will Germany be the weak link that would cause the collapse of the euro zone?


Will Germany be the weak link that could cause the collapse of the euro zone?

Will Germany be the weak link that could cause the collapse of the euro zone?

©Ludovico MARIN / AFP


Germany faced a trade deficit last May. Is the deterioration of the German economic situation likely to worsen with the current crisis?

Atlantic: For the first time in years, Germany posted a trade deficit last May and is seeing its overall surplus disappear. To what extent is this a sign of a more structural deterioration in the German economic situation, accentuated by the current crisis?

Remi Bourgeot: The German trade surplus has been on an extraordinary trajectory since the mid-2000s, with a current account surplus almost continuously exceeding 7% of GDP since the early 2010s. Beyond a historical propensity to over-export, this trade performance has been driven by both a political and economic strategy of reducing wage costs with the reforms of the 2000s. This approach was combined with a compression of energy costs by the Russian development. gas imports, at the expense of diversification strategies by the south, which have been largely abandoned or reduced to fragmented projects, incomparable with the northern route. With Nord Stream 1 and then 2, the country was going to have access to a supply greater than its national needs and become the nerve center of the European gas system, by re-exporting its direct imports of Russian gas, thanks to an extensive storage and redistribution system. .

The energy crisis is now profoundly disrupting this economic model. Behind the current figures for consumer price inflation of around 8%, the rise in energy prices, of the order of 100%, is driving up production prices, which have increased by 37% in one year. This is a radical change in economic conditions that calls into question its industrial position. And even beyond the question of prices, it is the prospect of energy rationing that raises the greatest fear of a destabilization of industrial production, which will add to the long list of shortcomings that European industry already suffers from.

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Given the current situation, combined with the 75 basis point rate hike by the ECB, could Germany become the weak link that would cause the eurozone to collapse?

We must distinguish between the developing economic crisis, with Germany at the center, and the threats to the architecture of the euro zone, which focus again and again on the countries most sensitive to rising rates.

Building a massive trade surplus was at the heart of Germany’s growth strategy, in particular to reduce unemployment in the 2000s. Then, with the euro crisis, this cost-cutting strategy suddenly won out over the so-called peripheral countries, most of which have embraced it without restraint, like Spain in particular. The trade surplus has become the center of Europe’s economic strategy, however weak the resulting growth has been. This strategy was largely based on reducing wage (and energy) costs much more than productivity gains and cutting-edge skills development. This is the main flaw of this approach. Today, Europe finds itself lagging behind on many fronts of the ongoing industrial revolution and retains an uneasy bystander status in many areas of raging technology warfare, as exemplified in electronics and the response to semiconductor shortages in particular.

The change in the trade position of the euro zone with the appearance of a deficit that continues to widen, fueled largely by the erosion of the German surplus, is shaking up the strategy that practically the entire euro zone is facing to avoid break ten years ago that. With regard to the architecture of the euro zone from the point of view of debt markets in particular, Germany, with its low public debt and its gigantic trade surpluses accumulated over thirty years, does not as such question the financial integrity of the euro zone from the point of view of market pressures on rates. In these markets, it is the countries whose very high debt requires low rates of refinancing that are in a more difficult situation. And they are offered no simplistic way out of it this time, be it monetary flooding by the central bank (whose arsenal is neutralized by the challenge of fighting inflation) or widespread cost cutting.

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Can Germany reverse the trend, economically and politically?

Now it is necessary to operate an economic revolution to decentralize, easily, the low costs, whether they are energy or wages. The compression of energy costs has developed on the basis of a renunciation of the objective of energy diversification, greatly aggravated by Germany’s hasty exit from nuclear energy, which has made it even more dependent. As for the compression of labor costs, it has often been carried out at the expense of innovation and productivity grains, leading to a headlong race of technological distancing from the continent. In the German case, this approach was based on an excessive insistence on the effects of branding and prestige linked to a “made in Germany” which, however, had lost part of its industrial meaning, both in terms of the rupture of the production chains than the reality of the technological content. From electric vehicles to electronics, Germany and Europe thought that they could rely too much on advantageous positions inherited from the past without projecting themselves technologically enough. The situation is particularly worrying in Western Europe in general. The extreme geographic optimization strategy led to a relegation of scientific and technical skills in favor of a focus on management and services that were often not very tangible, while Central and Eastern Europe became the breeding ground for technical skills, and in particular mathematics. , of the continent. Advanced AI centers are opening faster in Romania today, thanks to these low costs, of course, but also and above all because we have never stopped teaching mathematics there according to advanced conceptual standards, formerly known as “French style”. “…

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