The German economy has been one of the wonders of the world over the last couple of years. While the rest of Europe staggered, German unemployment fell to the lowest level in decades.
This week the Organization for Economic Cooperation and Development, the club of developed economies around the world, issued a new "Economic Survey of Germany." The biggest challenge it could find facing the country was finding enough workers.
It recommended steps to encourage more women to work.
"Please accept our sincere congratulations for a well-managed economy," said Angel Gurría, the OECD's secretary general, in a speech in Berlin. The country's "growth model has been so successful in navigating through the stormy waters of the crisis."
The German labour system, with its incentives to move workers to part time rather than lay them off, does appear to have been critical in keeping the country's unemployment rate from rising more than it did during the credit crisis.
But the decline of unemployment since then has more to do with the fact that Germany - perhaps unintentionally but certainly effectively - has managed to assure that its currency is undervalued, both relative to that of its neighbors and to much of the rest of the world. That has helped the country's exporters and brought more business to the country.
In the Great Depression, many countries tried devaluations to gain export advantages over rivals. The strategy became known as "beggar thy neighbor." It generally failed to work because other countries responded with their own devaluations.
Now some of Germany's neighbours have been reduced to begging. They cannot take a page from the Depression playbook and devalue their own currency. They no longer have one.
The creation of the euro a dozen years ago at first seemed to provide a bonanza to many countries that adopted the currency. Their borrowing costs fell, as currency risk seemed to vanish and interest rates converged with the already low German rates. That cheaper credit helped them to borrow and grow. But most did little to hold down labor costs, or to enact structural reforms to let them cope with an environment where they could no longer regain competitiveness through currency devaluation.
The result is that unit labor costs, one measure of competitiveness between economies, fell in Germany while they were rising in other countries. Since the crisis, they have stabilised and even declined in many countries, but they are not close to making up the difference. German costs are not rising either.
That makes it much harder than it used to be for the rest of the countries in the euro zone to compete with Germany. Germans are correct when they say that it was mistakes made by the other countries - whether in allowing real estate bubbles in Spain and Ireland or borrowing too much and failing to enact structural reforms in Italy - that caused the problems. But the euro has become a straitjacket for troubled economies trying to recover.
For Germany, the problems of its neighbours have helped it compete against non-European exporters, like Japan and the United States. The value of the euro is set by markets, but it seems reasonable to think it is based on some sort of average condition in the euro zone. If Germany still had its own currency, it would no doubt be stronger than the euro is now.
The impact of currencies could be seen earlier this month on successive days when Nissan, the Japanese automaker, and Daimler, the German maker of Mercedes cars, announced profits. Nissan moaned about the yen, which makes it very difficult to make money exporting cars from Japan, while Daimler forecast strong earnings if the euro stays where it is. The euro has lost a third of its value against the yen since the credit crisis began.
The OECD report is worth reading for its explanation of labor policies that other countries should consider. In good times, many German workers work overtime but are not immediately paid for it. Those hours are credited to their account, and when times get rough they go on part time but are paid full-time wages, with the difference coming out of the account. Another government policy allows companies to reduce hours with the government making up two-thirds of the lost pay.
Those policies no doubt reduce hiring when times are good, but also hold down layoffs when times are bad.
Not all is rosy in the German labor market. Felix Hüfner, an OECD senior economist in charge of the German desk, told me that he was worried about the fact that about two-thirds of younger German workers did not have permanent jobs. Instead, they have "fixed-term contracts," which make it easier for companies to let them go when the contracts end. Germany may, he said, be in danger of becoming a "two-class society," with most older workers in a protected group and most younger ones outside of it.
The euro zone is also starting to look like a two-class society, with Germany and a few other northern countries in the top class and most of the rest in the bottom tier. France is somewhere in between.
Within each class, attitudes are hardening against the other. "The birth defect of the euro was to put very different cultures of economic activity in the straitjacket of a single currency," a commentator, Jan Fleischhauer, wrote in the German weekly Der Spiegel after an Italian cruise ship ran aground last month.
"Be honest," he added. "Did it surprise anyone that the unlucky captain of the Costa Concordia is Italian?" He asked whether anyone could imagine that a German, or even British, captain would have behaved as the Italian did.
An Italian newspaper, Il Giornale, fired back with a front-page article denouncing the Der Spiegel commentary. "We are persons to avoid, a burden for Europe," the author, Alessandro Sallusti, wrote. "The Germans are a superior race. We have already read that in the speeches of Hitler."
Germans are increasingly angry about having to bail out Greece and other countries, while those countries react bitterly to being forced to take orders from Berlin. The Financial Times reports that "a right-wing Greek newspaper depicts Angela Merkel, Germany's chancellor, in a Nazi uniform above the headline 'Memorandum macht frei' - an allusion to the memorandum in which Greece's foreign creditors demand more austerity measures and to the Auschwitz slogan."
One of the great accomplishments of the European Union has been an end to the possibility of war in a Continent that started two world wars in the last century. But the euro increasingly appears to be a step too far, or perhaps not far enough. A currency union cannot endure if countries pursue very different economic, regulatory and fiscal policies.
Greece is an outlier, a country that lied its way into the euro and should have been kicked out when that became known years ago. But other countries are also at severe disadvantages to Germany now, after a decade in which labor costs diverged so sharply. Neither austerity nor structural reforms are likely to improve their competitiveness in the near future. German inflation could help, but that is an idea with no traction in Germany.
The euro has been very good to Germany, but if the country wants to continue to reap the benefits it needs to do more than angrily pay for bailouts while increasing its demands. Having already imposed an unelected prime minister on the Greeks, it now wants elections delayed to assure that the government continues to follow proper policies.
The two classes of Europe need to either get different currencies or become much more integrated by agreement, not dictation.
One trouble with "beggar thy neighbor" is that the neighbors don't like it. During the Depression, they could retaliate by devaluing their own currencies. Now they are simply getting angry, and hitting back at Germany the only way they can, with Nazi allusions and, in Athens, burning buildings.
©2012 The New York Times News Service
