Germany and the Euro

David McWilliams has written another article about the real motives behind the EU fiscal compact treaty. As I mentioned in my very first post, this treaty is good for Germany, as it seeks to consolidate their position as Europe’s industrial and financial engine and to avoid the collapse of the euro, which is their (cheap) ticket to economic success.

Let me describe the problem facing a small country on the periphery of Europe as simply as I can. We are small, we can’t compete with a large economy like Germany, especially if we’re using the same currency. So what do we do? We buy German goods, because we can’t make them cheaper here. In turn, we sell our produce to Germany – milk, butter, cheese; all those things that sound so good when you put the adjective Irish before them. But again, because we are trading on Germany’s terms, we sell these things at the prices we are told to sell them at. Our export sector is hampered by a currency that is too expensive to sell to most of the rest of the world, and too cheap to have any real buying power at home. The result is the huge imbalance in capital flows between the debtor and creditor nations, and  David points out that it is this, not budget deficits (Ireland and Spain both went into the crisis with surpluses, so government spending did not cause this problem) that is the problem for the euro.

So the answer does not lie in austerity, and all the other right-wing mumbo-jumbo that we keep hearing. The problem is not that we’re spending too much of Germany’s money, it’s that we can’t sell our own. We made this choice; but in a month or two we could un-make it.

 

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