No quick fix for Euro - maybe a slow one?


Stephanie Flanders analyses Germany's options

If you know anything about the Euro crisis you will know that there are "no quick fixes". But it's been going on so long now, you'd think there might have been time for a slow one.

I discussed part of the long-term economic solution to the region's problems on Wednesday night in a piece for the BBC's 10pm television news: in or out of the Euro, to have any chance of growing their way out of trouble, the crisis economies need to rebuild their competitiveness.

That means Germany has to lose some of its competitive edge, at least within the single currency zone. Why? Because, like it or not - and Germans don't - competitiveness is inherently relative.

You always have to be more or less competitive, compared with someone else.

As I have discussed many times, the huge imbalances that grew up between different parts of the Eurozone before the crisis were in large part a reflection of the fact that northern economies like Germany and the Netherlands were becoming a lot more competitive than the ones in the south.

Thursday's PMI surveys for the Eurozone make for a depressing read - there's little sign that those crisis economies are about to grow their way to a better future any time soon. Quite the opposite.

There is also disturbing evidence that the weakness in the so-called periphery countries has spread to the 'core' - not just France, where the index reflecting new manufacturing orders fell to its lowest level since 2009, but also to Germany.

Taken together, these and other recent data suggest the Eurozone will shrink in the second quarter, having only very narrowly avoided a negative figure for the first three months of 2012.

But, if you step back from the monthly and quarterly figures, there IS quite a lot of evidence that the slow economic fix to the crisis is happening.

Costs are being squeezed in the crisis countries - and pushed up in Germany. This German recovery has also been a bit more consumption-led than in the past.

Economists at Commerzbank reckon that Irish unit labour costs, at the start of 2009, had risen about 23% faster than the Eurozone average since the start of the euro.


The gap now is about 8%. Spain went into this period with unit labour costs that had grown 10% faster than the average - that has also more than halved since 2009.

You can point to similar progress in Portugal and Greece. The only country that has not really made up the ground it had lost is Italy.

German labour costs were kept broadly flat during the 2009-10 ( it's one of the factors that kept their employment so stable during the recession).

But there are signs that they are now creeping up - notably, in that 4.3% pay deal for the IG Metall union last weekend, which covers more than 3 million workers and sets the tone for a lot of others.

If that continues, Commerzbank reckons the periphery could rebuild their competitiveness vis a vis Germany by 2015 - two years earlier than if German costs remain flat.


Other estimates suggest that a 4% inflation rate in Germany would allow the ECB to stick to its 2% target for the Eurozone as a whole, but save the periphery from outright deflation.

That may not be politically feasible. But of course, things would be easier still for the south if Germany's recovery continued to be driven by consumption, as well as the traditional exports.

All of these parts of a slow-burn solution to the economic piece of the crisis are actually happening - however dark the headlines.

The problem is they are happening too slowly for financial markets - and they are happening with too little growth, especially in the periphery, for ordinary people to see any light at the tunnel, and for these countries' debt dynamics to start looking remotely sustainable.

Reason enough for politicians to keep searching for that elusive quick fix.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 18.

    The Euro was a way for the French (Mitterrand & Delors {EU Comm.]) to break the power of the Bundesbank and German mark. The Bundesbank/German people never wanted it; however, it was a condition of the French agreeing to German reunification, which Chancellor Kohl wanted for his own posterity. Now it's hardly surprising that it has not worked. History can teach us a lot about why we're here.

  • rate this

    Comment number 17.

    "No quick fixes".

    Even if there was a quick fix available, how many of us have any faith that the EU/Euro leaders will take it?

    This has been left far too long and the damage has been done.

    For me, I will never trust the EU or Euro leaders again. It is not a currency they are playing with. It is PEOPLE'S LIVES.

    I want a Referendum and then out. Never again.

  • rate this

    Comment number 16.

    Steph, the analysis of the contraction of labour cost differential is wrong. The reason is the lag of the Ger econ compared to recessional EZ countries. The labour costs in Ger will fall as the recession bites in the EZ causing the differential to widen again. Ger will always be more competitive because of easier labour laws. The only fix is end Euro or United States of EU with same laws, one gov.

  • rate this

    Comment number 15.

    Arrrr!! I'm losing the will to live.

    PLEASE can we just get on with the Euro disaster so we can then start to work out what to do next. This limbo state is doing my nut and not helping anyone.

    I want to be buying a bunch of shares when the equities low point materialises.

  • rate this

    Comment number 14.

    Slow, slow, quick quick slow...
    So - while EU leaders foxtrot around the problem, the markets will decide whether Greece (and the other PIIGS) stay in the euro or not..
    In any case, isn't lending more money to Greece (in order to keep them in the euro - perhaps) - an awful lot like the sub-prime loans in the USA..?

  • rate this

    Comment number 13.

    Surely a big part of the problem is that Germans make top end goods -BMWs, Siemens etc & export them as result - largely the PIIGS don't.
    Lower costs won't change this & who will set up new enterprises if it's all austerity? Reputations like BMW's etc take a long time to develop - can the PIIGS compete without policitcal union - hicksville Alabama is not New York City?

  • rate this

    Comment number 12.

    The problem with this crisis is that is more about financial rather than economic problems. The solutions - austerity - are primarily carried out for financial reasons without little thought to the economic & social consequences. perhaps we should be looking to reform the financial markets (which caused the problem in the first place)

  • rate this

    Comment number 11.

    Wage restraint by German workers has led to financial stability and is part of the country’s economic policy.

    The economic policy of the Greeks and French (et al) is to take more holidays, pay themselves more, retire earlier, work shorter hours, and then ask Germany to pay for it.

    I’m with the Germans on this one. The countries that have spent their money need to stop spending and work more

  • rate this

    Comment number 10.

    This is right. The Euro can survive, as long as you let the price mechanism do its work. That means you have to remove all the social protection for labour introduced by the EU so that wages can fall, including the ending of the minimum wage. Then you need to end all bailouts, and ECB support for busted banks, and price adjustments will work their magic.

  • rate this

    Comment number 9.

    Why should the German taxpayers make a free giftt to Greece (and the rest of Southern Europe) by reducing competitiveness? Much better if we abosorb the pain now and Greece and the rest of Southern Europe exits the Euro. They will quickly recover competitiveness by devalutaion of their new currencies.

  • rate this

    Comment number 8.

    Fairly spot on article which really supports the view that 'kicking the can down the road' on debt/default is a deliberate atempt to buy the time necessary to make slow painful changes. The alternative view is that it is just storing up trouble. I generally agree with the former that potential disaster is better forstalled than rushing headlong into the unknown.- a massive default and Euro exit

  • rate this

    Comment number 7.

    "Spending is saving. Borrowing is reducing debt" The newspeak Labour fix for the economy could have been written by George Orwell. However, Cameron was rightly rebuked for calling Balls a "muttering idiot". he is more prone to shouting rather than muttering

  • rate this

    Comment number 6.

    meant to say UN competitive!

  • rate this

    Comment number 5.

    A quicker fix is for the peripheral nations to anounce their intention to reinstate their own currencies with the support of the ECB and other EZ nations in both redenominating and restructuring their public debts, whilst allowing these nations to stay in the EU, and receive help in tackling tax avoidance/evasion and corruption.

  • rate this

    Comment number 4.

    This may adjust our competitiveness with Germany but not with the rest of the world. The Euro is still too strong for us to compete. We need a drop of at least 15% but preferably 20% against a basket of currencies. Salaries, costs and prices are still way too high.

  • rate this

    Comment number 3.

    Burdened by excessive debt, large public sectors and over regulation most of the OECD is basically competitive. There is no quick fix. The flab was accumulated over a long period of time. It will take a long period of time to shift.

    The idea of spending/growing our way of trouble is a nonsense. Unfortunately austerity is the only way to shed the flab / get back to reality!

  • rate this

    Comment number 2.

    The reality is there is no easy fix ...

    The money has been spent , the deficit created . One way or another it will have to be paid back.

    If the Greeks think they can default and start again, then they will be mistaken , the UK taxpayers won't lend them any money and I can't see the Germans relaxing their conditions. Its time they started selling their assets.

  • rate this

    Comment number 1.

    There is a 'quick fix' and every Guvt in Europe knows it but they will do ANYTHING to avoid confronting it. BAN IMPORTS FROM CHINA. Or hike the import duties so that European mfrs get a chance of competing. Whether supermarkets or retail chains & BT like it or not is immaterial they will have to do it sooner or later. I'm told it'll 'increase inflation' - why? It will certainly reduce landfill.


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