Germany's Rise and Dominance in the Euro Zone

Written by Dae-Han Song (chief editor, World Current Report)

On the day of the July 5th referendum, Greek people voted to reject austerity measures demanded by the Troika in exchange for a third bailout package. Then, in a great blow to democracy and national sovereignty, the Greek party Syriza was forced to go against the democratic wishes of its people and adopt even harsher austerity conditions to remain in the euro zone, and Greece, effectively, became an economic protectorate of the Troika. Leading the charge against Greece was Germany, the euro zone’s economic powerhouse. Despite Syriza’s retreat, fight remains in Europe among the malcontents of austerity. To succeed, those in Germany must join the anti-austerity ranks; for such forces to accomplish this coup against the leaders of austerity, they must first defeat the neoliberal logic of competitiveness at the root of Germany’s attitude towards austerity. Germany’s unions, leftist political party, and progressive social movement must organize these malcontents within austerity to act in solidarity with those targeted for austerity in southern Europe.

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Germany’s Economic Rise The Merkel administration’s popularity in Germany after its victory over Syriza can be attributed to the logic of competitiveness: For Germany’s economy to float while others sink, it needs to remain competitive. Remaining competitive means inflation and wages need to stay down, even amidst increasing productivity and a trade surplus. Such focus on outcompeting your neighbor leaves little room for solidarity: If others want to do as well as Germans, they too must bear the burden of austerity. Yet, not only does closer examination of Germany’s history prove this popular diagnosis false, but its realization further exploits all workers and threatens to rend Europe apart.

Even before the destruction and then reconstruction after World War II, Germany was an industrially powerful nation. During its reconstruction, it received several handouts and boosts that allowed it to rise as Europe’s leading exporter. Immediately after the war, Germany became the political battleground for the Cold War in Europe. It was this geopolitical importance that facilitated its massive debt relief from the US, UK, and France in 1953. It was this same debt forgiveness and restructuring that the Greeks asked of Germany, but which was denied.[ref]http://www.truth-out.org/news/item/32380-deja-vu-germany-tightens-its-economic-power-over-europe[/ref]

In 1990, Germany’s export competitiveness received another boost from reunification of the country. Unlike its competitors, Germany was able to benefit from the introduction of a cheap educated workforce from the former East Germany. In addition, to the benefit of corporations, East German workers put downward pressure on the wages of West German workers. Furthermore, the redevelopment of East Germany, and its increased consumption, created a hidden Keynesian subsidy for West German companies, not allowed under euro zone budget deficit limits. West Germans transferred taxes to East Germany, which then boomeranged back to the pockets of construction companies and retailers in West Germany.[ref]http://www.huffingtonpost.com/john-feffer/the-costs-of-german-reuni_b_6144764.html[/ref]

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The adoption of the euro in 1999 gave Germany another boost. Switching currencies from the deutsche mark to the euro resulted in a depreciation of its currency. The inclusion of the weaker southern European economies into a common currency meant Germany now had a lower value currency, while the southern Europeans had a higher value one. Thus, the adoption of the euro not only cheapened the price of German goods relative to competitors outside the euro zone, but also with those inside it. As a result, German exports more than doubled from €468 billion in 1999 to over a trillion euros in 2010 [1] at the expense of the other euro zone countries that experienced increasing trade deficits, and thus higher debt.

Given this strong foundation and various boosts, once Germany adopted austerity reforms in 2005, it became even more competitive relative to other euro zone countries. Before the reforms, Germany’s high productivity had made its workers among the most highly paid in Europe. Adopting austerity to cut real wages amidst high productivity was like a heavyweight boxer cutting weight to fight a welterweight one.

Given the false diagnosis, we must dispel the notion of austerity as “bitter medicine" for recovery for an industrially weaker southern Europe trapped in the euro. Rather, it is a slow poison that creates greater debt by arresting economic growth. As Armin Bobsien from One World Forum points out, “Immediately after the 2008 economic crisis, Europe (like the US) implemented economic stimulus through borrowing. Yet, it very soon switched to fiscal austerity, while the US continued its stimulus. As a result the US was able to achieve GDP growth while Europe saw little growth.”

Worse, austerity poisons all workers (including those in Germany) and threatens to destroy European unity. The logic of competitiveness is a vicious and destructive cycle: One can always be more competitive by working for less. Cuts in corporate taxes, worker’s wages, and social welfare in one country can be beaten by further cuts in another. And as workers tighten their belts, corporations fatten their bellies, solidarity dissipates, and bitter rivalry grows.

Germany’s Dominance in the Euro Zone Germany’s export competitiveness created great trade surpluses (currently the highest in the world [2]) and a strong currency. Germany was able to leverage both its strong currency and its capital share in the European Central Bank (at nearly 18%, it is the highest [3]) to shape the latter’s mission and influence it. As a condition for joining the common currency, Germany demanded the ECB’s mission be focused on price stability (consistent with Germany’s deutsche mark policy). Furthermore, as the biggest lender, Germany continues to influence ECB monetary policy. As a result, Germany wields great power over the monetary policies and hence the economies of euro zone countries.

The Casualties of Prosperity Despite the German economy's relative prosperity and low unemployment rate, German workers have not been spared the impacts of austerity. Inequality in Germany worsened after it instituted austerity reforms, making it the country with the highest wealth inequality in the euro zone.[4] Germany’s Hartz IV austerity reforms of 2005 decreased unemployment benefits, subsidized employers, and made it easier to hire workers during times of economic prosperity and fire them (or receive employer subsidies) during times of economic recession. In effect, it made it easier to extract greater profits at the expense of workers’ livelihoods and taxpayers’ money.

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“We have a very contradictory situation in Germany. A part of the German population is in a very good situation. In particular, the employees and workers in the automotive industry which is doing very well. On the other hand, there are many people in the service sector doing poorly,” points out Professor Heinz Bierbaum [5] of Die Linke, a leftist party and one of the few within Germany that supported Syriza’s anti-austerity struggle. Labor reforms have led to the rapid growth of low-paid precarious work concentrated mostly in the service sector.[6] One in five Germans work mini-jobs, part-time jobs that pay about €450 a month (US$503).  For two-thirds, that is their only job [7]. Nonetheless, precariousness impacts workers even in Germany’s more profitable export-producing plants. Even these firms structure their staff between a permanent set of workers and a flexible set easily hired during times of prosperity and easily fired during times of recession. For example, at BMW Leipzig, staff planning involves a core group of permanent workers supplemented with a flexible workforce that is determined by economic cycles. As a result, permanent employees work side by side with temporary workers,[8] impacting even permanent workers by decreasing union membership [9] which erodes their collective bargaining power[10]. With the sword of precariousness hanging over them, permanent workers become more pliable to wage freezes or deteriorating work conditions. As a result, Germany’s workers have not seen real wages increase since the early 2000s.

Seeds of Change Social struggle tills society so change can be sown. This year, Germany has seen a wave of historic protests. 350,000 days of work were lost due to strike actions, more than twice that of 2014, and over 10 times that of 2010[11]. Most were by those in the public service sector, which is among the most affected by Germany’s tight fiscal policies. 34,000 members of the Train Conductors’ union, who earn less than their counterparts in neighboring countries, went on strike greatly affecting German society: More than 6 million passengers and over 600,000 tons of raw material were left stranded. Their demands were for a 5% wage increase, reduced working hours, improved work conditions, and the right to organize non-driving personnel[12]. In April, about 10,000 postal workers went on their first major strike in 21 years against the Deutsche Post’s outsourcing of jobs that had driven down wages. Hospital workers also went on the biggest hospital strike in German history by walking out for four days. Their demand was for better patient to staff ratios. Preschool and kindergarten teachers have also been demanding that they be recognized as educators and be paid higher wages.

However, these struggles have not moved beyond individual wage and work conditions struggles[13]. To win permanent improvements in their lives, they must break from the notion of co-prosperity with capital. Only that will immunize them from capitalists’ greatest argument: the need for greater competitiveness - and hence austerity - in the face of globalized competition.

Prosperity for All The Blockupy movement aims to do this. Mostly made up of young people, it stands in solidarity with Greece against austerity, not simply for the Greeks but for all Europeans, including Germany. It entered the political stage in 2012, when 20,000 people gathered in Frankfurt to protest austerity.[14] It has held annual protests since then. Yet, its message of solidarity with Europe and social change in Germany has not been able to reach those unions waging the bread and butter strikes. Blockupy faces a challenging situation: Germany’s prosperity relative to the dismal situation in the rest of Europe has translated into high approval ratings for the head of austerity, Chancellor Angela Merkel. However, her austerity policies can only backfire as Germany’s export-oriented economy will suffer with the impoverishment of its customers in the euro zone. Worse, if the pain becomes too great and overwhelms Europeans’ desire for European unity, then Germany may lose the euro, a key factor in its global competitiveness.

As social movements from Sao Paulo to Seoul know, when the movement is at a lull, organizations must come together to educate, organize, and unite the people. As Professor Bierbaum states, “We need to create broad alliances with trade unions, and social movements to create broad political change in the direction of an active state focusing on the introduction of broad public investment programs to develop the economy and society.” Furthermore, in this period of economic stagnation and globalization, Europe can’t simply return to the social pact of social democracy based on promoting growth and redistributing it[14]. Instead of resuscitating capitalism, we must look past it. As Armin Bobsien of One World Forum notes, “We must move towards a new model that is ecologically sustainable and post-growth.” In order to achieve this, we “must change things bottom up. We need to reach out to disillusioned people and start educating and working with them creating change on local level, therefore giving them perspective and empower them to become themselves agents of change.” In other words, if hope can’t be found, it must be cultivated.

Thank you to Professor Heinz Bierbaum of Die Linke, Armin Bobsien of One World Forum, and Professor Hae Young Lee of Hanshin University for your valuable insights, knowledge, and time. Thank you to Kartini Samon of GRAIN and Adriana Sri Adhiati of One World Forum for your time and efforts.

1. http://fortune.com/2011/11/14/why-germany-needs-the-euro/
2. http://blogs.wsj.com/economics/2014/09/30/germany-replaces-china-as-worlds-trade-surplus-boogeyman/
3. https://www.ecb.europa.eu/ecb/orga/capital/html/index.en.html
4. A 2014 survey by the Berlin-based German Institute revealed that the differences in financial assets between the most affluent and the poor were larger than any other euro zone country. http://www.dw.com/en/germany-displays-highest-wealth-inequality-in-eurozone/a-17458083Furthermore, “85 German billionaires control the same amount of wealth - €400 billion - as half of Germany’s 80 million-large population.”http://www.rt.com/op-edge/171488-germany-minimum-wage-inequality
5. Professor Heinz Bierbaum is the Head of the International Department for Die Linke
6. http://www.dw.com/en/germanys-part-time-jobs-system-is-thriving-despite-fierce-criticism/a-15032531
7. http://www.wsj.com/articles/SB10001424127887324682204578512782697519080
8. Rosa LuxemborgStiftung Report
9. In the old West Germany, union membership stood at 35% in 1980, in the reunified Germany of 2013 it dropped to 18%.
10. Between 1995-1996 and 2010, the proportion of sites in what used to be West Germany that were covered by collective bargaining agreements dropped from 54% to 34%, while in the East collective bargaining coverage fell in the same period from 28% to just 17%.
11. https://www.jacobinmag.com/2015/06/germany-strikes-railroad-teachers-nurses/
12. https://www.jacobinmag.com/2015/06/germany-strikes-railroad-teachers-nurses/
13. https://www.jacobinmag.com/2015/08/blockupy-syriza-tsipras-euro/?utm_campaign=shareaholic&utm_medium=twitter&utm_source=socialnetwork
14. http://www.rt.com/news/occupy-frankfurt-rally-675/
15. John Bellamy Foster argues that the social democratic premise of promoting growth and redistributing it has reached its limit when faced with the reality that capitalism can no longer create sustained growth without financial bubbles. http://mrzine.monthlyreview.org/2013/foster290513.html