Wednesday 17 January 2018

When it comes to austerity, Germans want it both ways

MARSHALL PLAN: Germans weren’t harping on about austerity when the West underwrote the rebuilding of their country and fed isolated Berliners
MARSHALL PLAN: Germans weren’t harping on about austerity when the West underwrote the rebuilding of their country and fed isolated Berliners

Peter Casey

I WOULDN'T be revealing a state secret if I told you that the European economy, Ireland in particular, is facing a period of uncertainty.

European Union sanctions imposed on Russia due to the Ukraine crisis, followed by Russian counter-sanctions imposed on the West, are causing insecurity for an already weak economy. Dublin is certainly in a more positive frame of mind but go beyond the Pale and it is a different story.

A recent Sean O'Rourke Show on RTE Radio One featured an interview with Dr Eckhard Lubkemeier, the outgoing German ambassador to Ireland, who explained that it had been in Ireland's best interests to take the EC/ECB/IMF bailout rather than burn the bondholders and walk away.

He said that, like Ireland, Germany had come through a financial crisis - in its case as a result of East-West reunification. Germany's answer was simply to honour its debts, roll up its sleeves, and dig its way out.

According to Dr Lubkemeier, the German people and German companies climbed up and out mainly by increasing their efficiency and savings.

Austerity is in the German DNA. Most Germans have built a lifestyle around the goal of spending only the money they actually have and no more. They do not like fat credit card bills, and they refuse to amass large lines of credit.

The average German's savings are significantly higher than the average Irish person's - and, let's face it, leading up to the financial crisis, Ireland and other countries in Europe continued to spend money they did not have and to borrow money they hadn't a hope of paying back.

Now, austerity combines quite nicely with Germany's quality-driven but parochial consumer mind-set.

Germans shop with one assumption and one goal uppermost in their minds. Their assumption is that German products are invariably superior to foreign-made merchandise, and their nation has a three-to-one export-to-import ratio.

Their goal is to be as efficient with their money as possible.

Germans have unlimited confidence in their ability not only to make better products, but to sell them as well. They believe that their domestic wares were made with utmost efficiency - and efficiency, like austerity, is in the German DNA.

Austerity, efficiency and prudence are solid virtues, which Dr Lubkemeier and his colleagues earnestly preach to Ireland and the rest of the EU.

Ironically, by following the doctor's counsel, Germany's current gallop to European dominance would slow to a canter and soon come to a halt.

He said that Germany had dug itself out of financial crisis - and so should we - by mending spendthrift ways and paying debts. His point was that, in the end, by suffering the pains of austerity, we'd come out on top.

Like Germany.

The truth, however, is different. By our not burning the bondholders, the real winner was not Ireland, but Germany.

Think through the economics of a nation whose citizens like to save more than they spend, and when they do spend, spend as exclusively as possible on domestically produced goods.

Spending relatively little and allocating that modest amount to products produced at home leaves a paltry sum to spend on imports.

While a preference for domestic goods reduces German debt to other nations, German austerity means that, overall, domestic consumption 
is quite low as well.

For this reason, German industry is heavily fuelled by exports and German economic dominance is a product of domestic austerity combined with exploitation of the spendthrift ways of others.

It is hard to imagine a genuinely healthy relationship between any two countries that have so lopsided an export-import flow.

While counselling austerity in others, it is, in fact, the very last thing Germany wants from its trading partners. And while Dr Lubkemeier ascribes Germany's economic rise to prudence and discipline, the fact is that Germany had some help.

First, there was the Marshall Plan. Introduced in 1948, it benefited Germany more than any other country, and that nation used the massive injection of aid to rebuild an infrastructure and economy shattered by the very war it had started.

And because West Germany was a key bulwark against Soviet aggression in the Cold War, the nation was also able to take advantage of Nato to avoid squandering money on its own guns and missiles. Virtually every pfennig could be devoted to domestic economic growth.

Then, when the euro was introduced, Germany exploited a flaw in the introduction of the currency that allowed countries such as Ireland, Greece, and Spain to quickly amass huge debt in order to purchase German exports.

Over the past decade or so, Germany persisted in lending to countries it knew could not pay back their ballooning debt. Germany made as much as it could from these economic boosts, and then used its own austerity as a means of achieving dominance among nations.

By building its economy via an extreme imbalance of exports versus imports, Germany transformed itself into Europe's dominant lender and, conversely, transformed Ireland and other EU countries into its abject debtors.

Today, Germany ranks at the top of European countries economically as well as politically. Within the next 
10 to 15 years, we can expect to see that the smaller EU nations will become completely dependent on German largesse.

The driving premise behind both the Marshall Plan and the European Union was that the economic success of any European nation would lift the others.

But post-war German history has been a tale of one nation boosting its status while bringing others down.

Not only is Germany on top, it continues to rise in relation to everyone else as it preaches austerity but relentlessly builds its accounts receivable.

Don't get me wrong. There is much to admire about and learn from the German experience. The government has not dictated a policy of austerity. Rather, that policy has risen from the bottom up. It is part and parcel of the German character.

Living a simple life in which you purchase only what you need and save the rest is not just a national custom, it's a personal imperative.

I recently visited a German friend. As I walked into his house, I realised that there were none of the signs of the conspicuous consumption we see even in relatively modest American or Irish homes. Everything my friend needed was here - but nothing more. His furniture was very nice indeed, yet minimalist. It was a German house.

Dr Lubkemeier is right. We smaller EU countries can learn a lot from Germany. Armed with the priorities of austerity and efficiency, Germany put its money in research and development, creating a technology more advanced than in the rest of Europe.

The investment has paid off in products people the world over are willing to go into debt to own.

Right now, Germany, via the ECB (which it essentially controls), continues to lend to countries that clearly cannot afford to borrow.

By increasing the debt of small nations, Germany continues to gain power as those debtor countries become increasingly dependent. Within 20 years, I believe it may economically own the small EU states - Ireland included.

As Dr Lubkemeier remarked, "size matters." No doubt. Germany has used it to get to the top.

We know what we can learn from Germany, which generously offers itself to us as an exemplar. But if we learn the German lessons, Germany will hardly like the result. Our people will stop buying so much from them, which means we will stop borrowing from them.

Germany, strong as it is, overwhelmingly depends on exports. If these were to drop sharply, the national economy would suffer a dramatic loss.

Many German exports are luxury-manufactured goods, like BMW and Mercedes automobiles or high-end household goods. Lovely products, but do we desperately need them?

For us in Ireland, it's time to think about what Irish products we can buy as well as what imports we can do without.

Let's hold onto our cars for a few extra years. Irish lamb is every bit as good as that from New Zealand, and I'll take Guinness over Dortmunder Export any day of the week.


Peter Casey is founder of Claddagh Resources and also a panelist on RTE's 'Dragons' Den'.

Twitter: @TheDragonPeter

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