Is Angela Merkel, the German chancellor, a female reincarnation of the “deutsche Michel”? Back in the 1840s cartoonists portrayed Germany’s everyman answer to John Bull as the victim of unscrupulous neighbours, who picked his pockets and stole the shirt off his back. It has been interesting to see the revival of this pre-Bismarckian self-image in the recent discussions about the causes and consequences of the eurozone crisis.
According to German economists such as Hans-Werner Sinn, the crisis has a simple explanation. While the virtuous German Michel toiled away, reforming his jobs market and controlling his unit labour costs, less scrupulous peripheral countries became uncompetitive by gorging themselves on cheap euro credit. When the crisis struck, the European Central Bank and other EU agencies sought to bail out the peripheral countries at the expense of the savers and taxpayers of the “core” – also known as the German Michel.
This narrative has popular appeal. Most Germans agree with Mr Sinn when he says “the new currency was conceived as a unit of account for economic exchange that would not have any wealth implications at all”. They share his view the peripheral countries need to do what Germany did after 2003 – reduce their price levels and regain competitiveness through domestic deflation.
But this argument is simply not credible. It rewrites history by pretending that the project for a single currency did not have fiscal implications from the outset. It understates how much “Michel” has gained from the euro and how much he would lose from its collapse. And it condemns southern Europe to a protracted depression that could ultimately destroy the euro.
There is an alternative narrative of the euro to Mr Sinn’s. The German economy in the 1990s was seen by many as the sick man of Europe. The costs of reunification were much higher than anticipated. Germany ran a current account deficit every year between 1991 and 2001. The euro solved these problems. The current account swung into surplus, peaking at 7 per cent of gross domestic product in 2007. The deficits of the other eurozone countries were the flip side of these German surpluses. Germany’s highly leveraged banks financed those deficits by buying the bonds of the peripheral countries.
The crisis of the eurozone did not happen because the southern states failed to enact German-style labour market reforms. The crisis was a transatlantic banking crisis from which the German banks were in no way exempt. Labour market reforms would also have done almost nothing to address the underlying institutional problems that are to blame for diverging competitiveness within the eurozone.
Now Europe is in a desperate mess that simply cannot be solved by deflation on the periphery. The situation in the south is much worse than most Germans realise. Gross debt will top 100 per cent in five states this year. From Ireland to Cyprus there have been drastic contractions in per capita GDP. Unemployment rates are terrifyingly high. This is a toxic mix and one that is politically unsustainable.
What can be done? First, banking union needs to go ahead because the crisis in the sector cannot be solved solely with sovereign backstops. That means a single supervisory mechanism, a European resolution authority and deposit insurance scheme. Secondly, some fiscal integration is needed as otherwise at some point peripheral sovereigns must default wholly or partially. A common eurozone budget is needed; eurobonds can no longer be a taboo.
Europe’s monetary union always implied some measure of fiscal union. Those who signed the Maastricht treaty either should have known it – or knew it and should have admitted it. For there is no example in history of a successful monetary union without at least some fiscal integration.
But in return, there needs to be meaningful structural reform in all eurozone states. The German belief in a quid pro quo is quite right. The illusion was to imagine that such reform could somehow be induced via a fiscal compact – Ms Merkel’s attempt to Germanise the periphery. Not only the US experience but also the German experience is that federalism is more likely to lead to institutional convergence than mere confederation.
A century ago, the German Michel underwent a personality change. One 1913 cartoon showed the brave young Michel in a sailor suit, standing up to the seaside bully John Bull. A year later, the same Michel, now athletic in build and giant in stature, was sweeping aside the Entente armies like dust with his broom.
After 1945, Michel reverted to type: helplessly watching the building of the Berlin Wall, tearfully welcoming its downfall. Now we have come full circle, returning to the Michel of the pre-1848 era, that Biedermeier figure much given to self-pity over the extortion perpetrated against him by his wily neighbours.
That may be good domestic politics. It may even help Ms Merkel secure re-election in September. But it is really terrible economics.
Niall Ferguson is Laurence A Tisch professor of history at Harvard University. This article is an abridged version of his Ludwig Erhard Prize acceptance speech on June 27
