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 38.


    i am well aware that all is not rosy in the German garden but the fundamentals are sound.

    you have not read the link, what you suggest doesn't work, Germany imports little but exports a lot, if everyone tries that, it fails because nobody buys the extra exports, while there is some potential to expand exports to outside EU they wont continually buy if whole EU refuses to import.

  • rate this

    Comment number 37.


    They do since a long time.There is no german company of relevance what is not present in minimum 3 different countries.
    And that only for production location.Siemens as example has 285 manufacturing locations and employees from 140 different

  • rate this

    Comment number 36.

    G8 Merkel - under urging from Obama & Hollande - signed onto statement calling for MIX with growth-promoting measures. Whatever this means. Leaders warned budget deficits had to come down, but they also acknowledged austerity & longer-term reforms can’t help countries out of recessions - not this year, not next. This means slow, SLOW, very SLOW.

  • rate this

    Comment number 35.

    And why should Germany pay italian DEBT as it was in 1990 as high as today so the DEBT is not even Euro related.

    true Italys debt is not from profilgacy since joining the Euro but from before, paying the interest on that meant limited investment which is partly why Italy has had poor growth which worried the markets & pushed interest rate up

  • rate this

    Comment number 34.


    i am well aware that all is not rosy in the German garden but the fundamentals are sound. This has always been the case in Germany except for when the lunatics took over. Germany does not want to get dragged back to that awful place.

    The challenge for all western counties is how to rebalance their domestic economies so they are not perpetually in debt.

  • rate this

    Comment number 33.

    EU leaders know they need stronger growth measures to help their economies expand out of this 2½-year-old govt debt crisis. But how? Persistent political divisions = G8 Summit Statement advocates MIX of austerity & growth, but lack of money = lack of comprehensive strategy.
    But not to worry informal EU Summit coming today Brussels (more likely to set the tone?).

  • rate this

    Comment number 32.

    There's only one way to fix this: referends in all EU countries.
    most in the EU don't want that&would consider it a waste of money, The Euro is still quite poplr too though many are so keen on closer political union. In most EU countries a refm on closer poli/union is the only thing that might get a no vote
    Not sure about yr 1st pt, but agree with 2nd.

    Still the only fix!

  • rate this

    Comment number 31.

    Look what happens when you don't have control and someone throws apparently free lunches at you. You live beyond your means, become fat and lazy and then you tell your children that they have to pick up the tab. The power crazy "leaders" love the buzz of squandering, deceiving, juggling, manipulating, thieving and telling people what's good for them.
    In the end it's all a load of B. Doors open at

  • rate this

    Comment number 30.

    ..beggars at the German door those proud European nations should start seeking to emulate their methods

    Germany is a good exporter but a bad consumer, near impossible for all to do that once. Also when you look at the detail the German economy is not as healthy as the headline figures suggest

  • rate this

    Comment number 29.

    I found myself hoping you'd give us an estimate of how much more competitive Germany is than the former DDR, and how much less competitive than the former BRD. The results of integration might give some idea of how fast or slow, well or badly this convergence plays out in practice.

  • rate this

    Comment number 28.

    I suppose we could take some comfort that extending further the uncertainty over the Euro bounces the markets down and up, up and down and back again, generating profits for traders & hence the Banks thereby increasing their liquidity. In addition, it produces revenues for HM's Treasury. :-)

  • rate this

    Comment number 27.


    Dont bet on that.Greece exist is highly likely.But the story is totally different with Spain/Italy.
    And why should Germany pay italian DEBT as it was in 1990 as high as today so the DEBT is not even Euro related.

  • rate this

    Comment number 26.

    When I want to read fiction, I prefer a good novel. There is no sense in which the states of the EU may be described as 'the region'. The crises in Europe - as in the US and the UK - were caused by corrupt and incompentent practices in international banks and corporations spanning 20 years. They were caused by fraudulant speculation not underperformance. In short, EU citizens have been robbed.

  • rate this

    Comment number 25.

    We can either carry on with this slow fix until about 2020 and have no growth or we have have Gr€xit + Spainish/Italian exits and get on with things.

    Germany need to decide how much they want to spend on their Euro project...

  • rate this

    Comment number 24.

    @5 Absolutely agree. But countries will have to leave EU or the free movement of people will have to be suspended to stop mass emigration from the EZ countries whilst devaluation takes place. I suspect one problem of Greece leaving the EU will be the fact that all Greeks in other countries in EU will become illegal immigrants.

  • rate this

    Comment number 23.

    The morally right solution to the crisis is to let Greece fail, which it will. I don't say this for sadistic reasons, we must mend the problem with excess credit and lenders taking crazy risks because they believe someone (taxpayer) will pay them back or worse they don't care because they have got their bonus and to hell with the consequences. The Euro theory as implemented has been proved wrong!

  • rate this

    Comment number 22.

    There's only one way to fix this: simultaneous referendums in all EU countries.

    most people in the EU don't want that & would consider it a waste of money, The Euro is still quite popular too though many are so keen on closer political union. In most EU countries a referendum on closer political union is the only thing that might get a no vote

  • rate this

    Comment number 21.

    There is no quick fix and the soft option becomes unsustainable.

    Europe needs self-sustaining growth but the mechanism for that has to be built over years in terms of product, expertise and added value.

    Rather than be beggars at the German door those proud European nations should start seeking to emulate their methods.

  • rate this

    Comment number 20.

    Germany is not just more productive than other European countries, it has a different culture in terms of national pride and the relationship between workers, bosses and banks. It will be interesting to see if German-owned companies like BMW, Demag etc move production to other countries because their labour costs rise. I suspect not because the Germans understand that in the long-term this damages

  • rate this

    Comment number 19.

    There's only one way to fix this: simultaneous referendums in all EU countries.

    The choices are:
    1.Pull out of EZ&EU
    2.Pull out of EZ but stay in EU
    3.Stay out of EZ but in EU
    4.Leave EU (for those not in EZ)
    5.Enter EZ
    6.Remain in EZ

    Implicit in YES to 5 & 6: closer fiscal and political integration.


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