In Germany the public image of the European crisis is rooted in prejudice. It is therefore necessary to clarify once again using the latest data what is really at stake and how the “great divergence”  between prejudice and reality has arisen.

Originally posted in German at Makroskop

Translated and edited by BRAVE NEW EUROPE

 

The debate about the European crisis and the relationship between the core European countries is becoming more acute almost daily. But it is above all Italy that is openly attacked in Germany and by the European Commission. France, which is also not making any progress in its economic development, is, so to speak, outside the circle of “countries to be disciplined”, because it positioned itself early on Germany´s side, i.e. apparently on the side of the so called “problem solvers” and is not regarded as the cause of the problem.

But this is a role that France cannot actually play because – measured by its economic data and problems – it finds itself in a much more Italian situation than a German one. The French playing the wrong role is fatal for the future of Europe. If the country were to take Italy’s side and openly question Germany’s hegemony today and in the past, that, rather than French chumminess with Berlin, would be a far better starting point for the survival of monetary union.

In this three-part series of articles, I will once again describe what is the true role of France and why an unprejudiced consideration of the facts hardly permits any other interpretation than the one regularly represented on our website Makroskop. In addition, it is an assessment of whether, and if so when, Europe and Germany might undergo a “moral and spiritual” transformation.

Historical burdens and normality

The history of the past 150 years has been full of armed conflicts between Germany and France. The image of the “arch-enemy” on the other side of the Rhine has traditionally been very popular in Germany. Above all, the massacre of exactly one hundred years ago had an incomparable impact on Franco-German relations and has made it impossible for the two countries to maintain normal political relations to this day. Anyone who saw the body language of Angela Merkel and Emanuel Macron in Compiègne, trying stiffly and desperately to show reconciliation in front of hundreds of television cameras, knows what I am talking about.

The German relationship with Italy is quite different. The country was never the “arch-enemy” of the Germans and stood at its side for some time, even in Germany’s darkest hour. Unlike the Rhine, the Alps apparently acted as a natural barrier and prevented the peoples from attacking each other at every opportunity and developing into arch foes.

In German-Italian relations, one should not underestimate the reconciliation effect of millions of Italians working in Germany since the 1960s. Unlike French cuisine, Italian pizza and pasta have long been an integral part of Germany’s culinary culture. The Germans have also become much more at home on Italian beaches than on French ones, because they find a former “guest worker” at every street corner ready to show them the way in fluent German.

Normal criticism and normal contempt?

One only has to hear the tone of current German criticism of Italy and its national debt, and the openly expressed anger of the Italians at Germany, to understand how normal the German-Italian relationship is, compared with the German-French one.

Conservative German media (here) and German economists (here and here) are stirring up hatred against Italy in a manner that is hard to imagine them doing against France. This inhibition towards the neighbouring nation is even more pronounced in France than in Germany. On almost every occasion the French prefer to accuse their own compatriots of not making enough effort and thus falling behind Germany. The current French central bank president, Francois Villeroy de Galhau, who comes from one of the few German-French families with a long tradition, is a constant admonisher of his fellow French citizens in this sense. He will certainly be rewarded for this with the post of ECB president, which is currently held by an Italian.

After the euro crisis began, French politicians instinctively stood solidly with Germany instead of siding with the southern EU periphery nations. What we have not yet seen, and what we apparently do not wish to see, is the fact that France, in terms of the issues at the root of the euro crisis, would clearly have been classified along with the southern periphery countries. Although France did not live above its means like the southern euro nations, it fell into the same trap in the same way as these, as a result of Germany’s austerity policy in the decade before the global financial crisis.

The French decision to side with Germany made it easier for Germany to attack southern European euro nations. Together with France it was able to sell itself as a friend of Europe, an objective arbiter, sitting in judgment strictly but fairly over the “sinners”, benignly standing up for financially and economically “healthy” conditions in the “well-understood interests” of the entire continent. If France had not decided to adopt this position from the outset, but had branded the German austerity policy as a violation of the most important rule of a monetary union, the 100th anniversary of the end of the First World War would certainly not have been celebrated so “harmoniously”, but the continent might be looking at a better future.

With France’s help, Germany can avoid a serious discussion of the true causes of the euro crisis. French policy has not only been giving the impression, even before Macron, that, with the help of grandiose French diplomacy, the Germans will be permitted to get away with this, without an open confrontation. Year after year, there have been no major changes as Germany dictates EU policy, and the chances of important corrections become ever more remote.

The “great divergence”

The divergence of the three major economies in the euro zone in terms of unemployment is striking. The large divergence, as one might call it, is evident in unemployment (Graph 1). While France and Italy are still close to the scandalous levels of 2013, Germany has managed to converge towards what many consider to be full employment.

Unemployment in the Euro Group

Once again the economic situation in Europe is deteriorating, as measured by the development of industrial production (Figure 2) and almost all leading indicators, while no one is even thinking of taking action. If the current decline persists or even worsens, France and Italy will once again fail to achieve production levels above those of 2011. Italy has not even surpassed its 2009 level. What is this if not a lost decade?

Industrial production in the Euro Group and Germany, France, Italy

Looking at industrial production over a longer period, from 1999 to 2017 as shown in Graph 3, there are enormous differences between Germany on the one hand and France and Italy on the other. Industrial production in the two smaller countries is now below 1999 levels, was very weak at the peak before the global financial crisis, and has never really recovered from the shock of 2008/2009. The situation is quite different in Germany, where production in the manufacturing sector was already well above the levels achieved in France and Italy in 2007. It then collapsed sharply in 2008/2009, but recovered quickly and is now more than 30 percent above the 1999 level.

 

Industrial Production

In the GDP growth rates calculated by statistics offices, the differences between France and Germany are far less evident (Figure 3).  Although Italy is clearly outperformed here too, France can take comfort in not having been overtaken by Germany as long as one only looks at these figures – at least if 1999 is taken as the starting point.

Real GDP

However, the German dynamic after 2009 is striking. If you set 2009  as the base, using the data in Graph 4, the world looks quite different. Here you can see the near stagnation in France since the global financial crisis and the much faster pace of the German recovery.

Real GDP

German prejudices instead of European diagnosis

German economists, and the German public in general, are afraid to talk openly about this enormous divergence. They prefer to paint a picture in which Europe as a whole has returned to robust growth. In mid-September, for example, the chief economics editor of the German weekly Die ZEIT wrote an intolerable article (which we shall look at in more detail later) claiming that the European economy was running at full speed (here) and that European inflation had returned to its target value. This is an absurd in view of the empirical findings for France and Italy.

The Süddeutsche Zeitung writes that the ECB must finally end its zero interest rate policy because economic growth is “solid” and inflation is at a “healthy level”. That is nonsense, because there are neither solid growth nor healthy inflation rates in Italy and France. Only by shutting one’s eyes and ears can one ignore the fact that the dynamics of development have been ridiculously low and even weaker than the core inflation rate in the euro zone – only 1 percent, despite the “boom” – which is the only thing that matters.

You cannot make a better Europe with politicians who are blind to events outside their own national borders and with a press that has an extreme German bias. If, rather than fighting these base prejudices, the public simply rehearses them anew every single day, then a reasonable person must conclude that the nations of Europe too immature to have a future as a union.

In the second part, you will read the results of a deeper analysis, which attempts to get to the root of  these misunderstandings and prejudices.