Ground zero of Europe's debt-currency-banking crisis isn't in Greece or Portugal or Ireland or even Spain. It's in Germany.
So says Martin Wolf, the estimable economics columnist of the Financial Times, who last week offered this wonderfully concise, if somewhat mischievous, description of how the vaunted German economic machine really works:
At one end is a powerful and highly efficient industrial export engine that generates a large trade surplus with the rest of the world, including most other countries in the eurozone. Instead of spending this new export wealth on a higher standard of living, however, parsimonious Germans prefer to save it, handing it over to thinly capitalized German banks that have proved equally efficient in destroying said wealth by investing it in risky securities issued, not coincidentally, by trading partners that need the capital to finance their trade deficits with Germany. To prevent the collapse of those banks, German taxpayers are dragooned into using what remains of their hard-earned savings either to bail out their hapless banks or their profligate trading partners.
It's what inevitably happens when a large, productive country tries to run a "mercantilist" economic policy predicated on running large and persistent trade surpluses.
Normally, what should happen to such a country is that, as a result of its trade surplus, wages and the value of its currency rise to reflect its new wealth and productivity. That makes those exports less competitive while encouraging workers to spend their increased income on cheaper imports. And in that way, the system brings imports and exports more into balance.
That rebalancing, however, hasn't happened in Germany. It hasn't happened because much of Germany's trade surplus is with other European countries with which it shares a common currency, so the currency can't adjust. It hasn't happened because Germans, by their nature, are eager to save and reluctant to spend their newfound wealth on imported goods and services. And it hasn't happened because the European Central Bank, driven largely by German economic rectitude and fear of inflation, has followed a tight monetary policy that has reduced growth and discouraged domestic consumption and investment.
But that's not how most Germans see things. What they won't accept is that they wouldn't have been able to sell all those beautifully designed cars and well-engineered machine tools if Greeks and Spaniards and Americans hadn't been willing to buy those goods and German banks hadn't been so willing to lend them the money to do so. Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others.
The danger of Germans misunderstanding the causes of the current crisis is that it leads them, and the rest of Europe, to the wrong solutions.
In the long run, the eurozone won't be fixed until Germany figures out how to generate growth and wealth without beggaring its neighbors and its trading partners. As Finance Minister Wolfgang Schauble acknowledged, Germany has become so prosperous "because it has more advantages from European integration than any other country." Unless Germans can find a way to share that prosperity, other countries may conclude that the price of membership to its club is just too high.