November 16, 2011
The NYT had a misleading piece contrasting the success of Germany with the difficulties facing the countries of southern Europe. The problem is not just a question of southern European countries emulating Germany, as the article implies. The problem is that Germany has acted to shut off the adjustment mechanisms that would allow southern Europe to accomplish this task
At the moment, southern Europe is not competitive with Germany, which is the cause of its large trade deficits. If these countries were not in the euro, they would simply devalue their currency. However, the euro rules out this option to restoring competitiveness.
The alternative would be to have a lower inflation rate than Germany. However, because the European Central Bank (ECB) has committed to sustaining an inflation rate of just 2.0 percent in the euro zone as a whole, there is very little that the southern countries can gain by having a lower positive inflation rate. Their only route within the euro to regaining competitiveness is to have a period of deflation. This is incredibly costly in terms of high unemployment and lost output. (Latvia is going this route now and has an unemployment rate in the high teens, after earlier hitting 20 percent.)
The German position on the heavily indebted southern countries is absurd. It wants to maintain its huge trade surplus with these countries, while still insisting that they make good on their debts. This is like a store owner insisting that his customers keep buying more from him, while still paying off their debts. This is not just a question of southern Europeans being resentful or jealous, Germany is asking for something that is impossible.
The article also likely misled many readers on Germany’s growth, telling readers that it grew 0.5 percent in the third quarter. This number is a quarterly growth rate. It is standard in the United States to express growth as an annual rate. Germany’s growth in the third quarter was approximately 2.0 percent at an annual rate.
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