An article by Derek Scally, German correspondent of The Irish Times, on Chancellor Merkel, was published on June 02, 2012.
This was my comment:
It's ironic that it was France that pushed Germany to support the creation of the euro as a quid pro quo for support for German unification but despite the euro in existence since 1999, it has not balanced its budget in any year since 1974 and its national debt to GDP (gross domestic product) ratio rose from 22% in 1975 to 90% in 2010. In addition, it has had a trade deficit in every year of the last decade.
France in 2011 had a deficit of €70bn compared with Germany's surplus of €158bn - - only 12% of the latter related to the Eurozone and two-thirds was ex-EU27. In effect, Europe would have been poorer without the global success of Germany's world class companies.
"Did I mention that -- after unification -- the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results? That wasn't long ago," Tyler Cowen, a US economist, commented in 2010. "And yet somehow it is a mystery, or a strange annal in some long book of Dogmengeschichte, that the Germans are not more interested in Keynesian economics."
Despite massive public spending since 1991, GDP per capita in the former East Germany is about 70% of the level in the former Federal Republic. Convergence within Germany or in the Eurozone, is a very long process.
Even if the weakest German regions were to grow a steady 4 percentage points faster than the strongest regions, it would them take more than 45 years to catch up.
In Europe, without checking the facts, commentators and economists can wrongly assume that the Germans are Europe's biggest savers and have no memory of the fact that as recently as 2003, Prof. Hans-Werner Sinn of the Ifo institute, had a book published: 'Ist Deutschland noch zu retten?' (Can Germany Be Saved?) - - Its blurb read:
“Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels. Germany is outperformed by its neighbours. It’s growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe. “
The sick man of Europe!
The benefits of reforms with flexible wage agreements were seen during the recession and up to 1.5m people were kept at work with the help of public subsidies. It's not all roses and in the services sector, there are too many on low pay dependent on public top-ups.
In France, President Chirac ventured into the minefield of reform in 1995 but he soon threw in the towel.
The UK's gross debt/GDP ratio is expected to be 88% this year compared with 145% in 1956.
Sir Samuel Brittan, veteran economics columnist of The Financial Times has commented: "The second world war was financed in the UK with a 0.5% bank rate. Why should it be more alarming for governments to get into debt to put people into useful work satisfying human needs than to borrow for guns and tanks whose only aim is to kill other human beings?"
Governments tend to do a lot more these days and a French male typically retires at 59 - say entering the workforce at 24 and living until 80 - - - 45 years of dependency. The French have a social security tax on wages of an average 40% (30% paid by the employer) and no country can now afford cradle to grave 'socialism' - - and in China, unlike France, most people have to purchase health services.
In countries such as France, Spain and Ireland, some groups have disproportionate benefits while young workers maybe lucky to get temporary work. In Ireland, the majority of private sector workers have no occupational pension while public sector workers have pay premia; guaranteed employment and a pensions scheme linked with earnings.
It all adds up and in 2011, the public pay and pensions bill (ex-local authorities) was over €17bn -- compared with €16bn in 2006 -- the peak year of the boom - - and €10bn in 2001. The social protection budget was €8bn in 2001 and €21bn in 2011.
There is need for reform because the global market is no longer Western Europe, US, Canada and Japan.
What is often ignored in Europe is that the growth crisis is not new and pre-dates the euro. Until the bitter truth is faced, the remedies will not match the challenge.
Eurozone countries like Italy, Spain and Greece have had trade deficits with Germany since at least 1980 -- 20 years before the euro launch. The International Monetary Fund (IMF) says the euro is a continuation rather than a structural break and the Fund's statistics show that since 1999, Germany's trade surplus with the rest of the world has grown faster than its surplus with the other Eurozone countries -- and faster still with European nations that have not adopted the euro.
Marco Annunziata, an Italian economist, says that implausible as it sounds, Italian voters have put up with an average youth unemployment rate of 30% for the last 40 years; Spanish voters with a rate of 32%. Italy experienced “strong” economic growth during 1994-2000, with GDP rising at an annual average of 2%. During this boom period, the youth unemployment rate still averaged 33%. In other words, one young person in three was unemployed when the economy was at its strongest. The rate never dropped below 20%.
Spain’s economy grew at an average of 3.6% between 1995 and 2007. During this impressive run, the youth unemployment rate averaged 28%; it was below 20% for just three years, with a “best performance” of 18% in 2006.
In 1994, Spain's total jobless rate was over 24% in 1994, 21% in 1997 and 8% in 2007 and back to 24% in 2012. Italy's jobless rate was higher in 1996 than it is now.
Italy's economy grew at an annual rate of 0.3% in the last decade. Ex-property booms in Spain and Ireland and a credit boom in Greece, there would have been no growth.
Much of UK growth was an illusion powered by public spending and the financial services boom.
Ireland's jobs in the internationally traded goods and services are below the 1999 level. In the period 2000-2007 -- the bubble years -- no jobs were added as employment grew in other sectors by 430,000.
Indigenous trading firms typically export about 35% of output and the sector added 10,000 jobs but the FDI sector lost 10,000 net jobs.
More on the Irish jobless exports surge here:
Reform is a dirty word in many countries in Europe because vested interests rightly fear change.
The World Bank's 'Doing Business 2012' rankings of the ease of doing business in 183 countries puts Greece at 100, behind Yemen and Vietnam and just ahead of Papua New Guinea. This compares with Italy at 87, just behind the former communist ruled Mongolia; Spain is at 44; Portugal at 30 and Ireland at 10.
There can be a case for long-term investment in current times. However, EU funds have supported significant improvements already in Greece, Ireland, Spain and Portugal.
Despite superior infrastructure, inward FDI as a percentage of Greece’s GDP averaged only about 1% from 2004 through 2010, compared with an average of 8.1% in Bulgaria, Turkey and Romania.
A solution will have to be a two-way street.