Why did Germany abandon the good path?

A decade ago, looking at the state of the union the Bush administration, it seems to me that it was the European Union, and Germany in particular, had replaced the USA as the last, best hope of earth.  As recently as five years ago, I posted an article on Germany as an Economic Role Model.

Germany had seemingly created an economy based not on cutting costs, but on creating value, investing in people and worker participation in decision-making.  The Germans had learned how how to hold their own in international trade and still enjoy high wages, generous social benefits and excellent public services, without sacrificing civil liberties.

Or so I thought at the time.  But the Greek debt crisis shows Germany as much in the grip of a financial oligarchy as the USA was.

The German leaders have embraced the idea, very familiar to us Americans, that the purpose of an economic system is not cooperation for mutual benefit, but to reward winners and punish losers.

The best way to help Greece’s creditors is to promote Greece’s economic recovery, so at least a portion of the debt can be repaid.  The austerity measures being imposed by the European Central Bank, European Commission and International Monetary Fund are driving Greece deeper into economic depression.  They are being imposed as a punishment and a deterrent.

The German leaders also have made the mistake of allowing central banks, rather than the public, to determine economic policy.   The problem with this is that bankers have different priorities than the public.

Broadly speaking, bankers want zero inflation and debts to be repaid in full.  All other things being equal, these are desirable goals, but not at the cost of rising unemployment, falling wages and non-functioning government services.

Unfortunately the European Central Bank is in charge of European monetary policy, and the public has nothing to say about its policies.   It is governed by a committee consisting of 19 national central banks and a six-member executive board appointed by the European Council.   I looked up “accountability” on the bank’s web site, and found that this consists of regularly issuing reports.

The best way to enforce accountability for the Greek debt crisis would be to investigate the Greek public officials and their banker advisers who created it, and determined whether they should be charged with malfeasance.  Instead the banks have been bailed out, and the public officials escape blame—much the same as in the 2008 financial crisis in the United States.

Volkswagen’s transparent factory

Hat tip to Bill Elwell

Thomas Geohegan’s Germany

I remember once years ago when my friend George was telling a bunch of us what a wonderful vacation he had in Paris.  It was a great place to be, he said, but there was one problem with the French and with Europeans generally.  “They have it too good.”

That’s the impression many Americans have of the European welfare states.  Yes, it’s nice to have long vacations, universal health care, beautiful parks, generous old age pensions and so on – but how then can the Europeans compete with the Chinese, the Koreans, the Indians or, for that matter, us lean and mean Americans.

Thomas Geoghegan, a Chicago labor lawyer, has written a new book Were You Born on the Wrong Continent? How the European Model Can Help You Get a Life to argue that the reverse is true.  He wrote that what looks like socialism to us Americans is precisely what makes France, Germany and the other leading European countries competitive.

He concentrates on Germany, because it is Europe’s leading economic power and because he likes the German model better than that of France and some of the others.  Germany’s social democracy is based not so much on governmental power as on empowerment of workers, he writes.  They have strong unions, workplace councils, representation on boards of directors and regional collective bargaining (so that the German equivalents of Borders and Barnes & Noble have to pay the same wages.)

This works.  The European Union, unlike the United States, has a positive trade balance.  Germany has a positive trade balance with the world, and with China specifically.  In fact, Germany for years was the world’s leading exporting nation, and now is a close runner-up to China; the United States is a distant third – astonishing when you think Germany has a population of 83 million, the United States more than 300 million and China more than 1 billion. None of this would be true if the keys to success in the global economy were low wages, no benefits and union-busting.

Yes, Geoghegan admits, Germany isn’t perfect, Germany has problems, the German economic model is eroding a bit under global competition, but overall Germans are doing better under their system than we Americans are doing under ours.

In Germany, it is difficult (though not impossible) for corporations to shut down operations and shift production to poor countries, so they think about ways of making their domestic industry more efficient and productive.  And because workers have a voice in decisions, they accept what is decided.  In the United States, Geoghegan says, it is easy for corporate management to make a decision, but difficult to implement it; in Germany, it is difficult to come to a decision, but easier to carry it out once decided.