German economic policy helped trigger eurozone crisis, report says

The International Labour Office (ILO) published its annual report on Tuesday, a 121-page tome on employment trends. Buried within the report, however, was one surprising bit of analysis. Contrary to wide held views that Europe should look to Germany as a model of economic propriety amid a persistent debt crisis, the ILO blamed the eurozone’s strongest economy for having largely contributed to the bloc’s woes.

“One could consider Germany more of a break in, rather than the engine behind European growth because of the economic policy it has imposed since the beginning of the 2000s”, said German economist Till van Treeck.

The report points to labour market reforms initiated by former German Chancellor Gerhard Schröder’s government in 2003 as one of the underlying factors behind the eurozone crisis. In a bid to stimulate the economy, Germany cut unemployment benefits and moved to deregulate the labour market.

“The cost of reunification meant many lean years in Germany, and the country wanted to regain its competitive edge”, said economist Sandrine Le Bayon, who specialises in Germany’s economy.

As a result of the country’s economic reforms, German exports flourished, marking a period of renewed economic growth. Despite this, wages had more or less stagnated since the early 2000s, meaning that German consumers were buying little, thus depriving other European countries of a key market.

The situation had a severe impact on trade with countries such as Spain and Ireland, and ultimately contributed to their growing deficits.

“The economic growth we saw as a result of the increase in exports came at the expense of other European countries”, said Van Treeck.

According to Le Bayon, when the global economic crisis hit in 2008, it “highlighted the latent problems with Germany’s growth model and Europe’s economic structure”.

While Le Bayon agreed that Germany’s economic policies played an important role in Europe’s debt crisis, she feels they are not entirely to blame. She argues that other eurozone countries such as Portugal and Greece also greatly contributed to the situation by accumulating an “excessive” amount of debt.

German selfishness?

With that said, Le Bayon admits that “Germany has had a non-cooperative economic strategy for a long time”.

According to Van Treeck, Germany’s “non-cooperative” attitude toward its European partners “is symbolic of the fact that there is little solidarity among eurozone countries”.

More alarming than that, Van Treeck said, is the fact “no one has challenged Germany’s growth model since Greece’s economic crisis exploded, despite the fact that it probably poses the greatest threat to the eurozone”.

As eurozone countries struggle to rein in their national deficits with austerity measures, consumers are coping by tightening their belts and buying less, a reaction that could have serious consequences on German exports. In the end, Germany’s push for greater austerity across Europe could cripple the very foundation of its economy.

“If Europe really wants to get out of its crisis, one of the first things that needs to happen is that Germany needs to stimulate domestic consumption to help its neighbours' exports”, Van Treeck explained.

To do so, Germany’s government would have to push for higher salaries in the labour market, an initiative the country began to take in 2010 while economic growth was still high, according to Le Bayon.

Yet as economic experts project that Europe is heading for a major recession in 2012, there are fears Germany may halt these very efforts to increase salaries.