Germany and France are in crisis — is the next global financial crash brewing?
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In Germany and France, support is growing for parties of the hard right and the hard left, and it is not difficult to see why.
A crisis that affected countries on the periphery of the 20-nation eurozone 15 years ago — Greece, Portugal and Ireland — has now worked its way to the core of the single currency zone.
Let’s be clear: France is not the new Greece. The European Central Bank would probably step in to buy French bonds in the event of a full-scale speculative attack, and is now better equipped to do so than during the last crisis.
Even so, there are signs of history repeating itself. The global financial crisis that erupted in 2008 did not appear out of nowhere, and there were plenty of warning signs in the 1990s — from Mexico to Thailand, and from South Korea to Russia — of trouble ahead.
In spite of these red flags, few imagined the crisis would spread to the world’s biggest economy, the US, until it was too late. There are red flags flying now too. It matters that Olaf Scholz faces being ousted as chancellor in February’s snap election in Germany, and it matters that Emmanuel Macron can only get MPs to pass a stopgap budget in France. These are not minor squalls; they are signs of a coming storm.
The problem for the eurozone’s big two is that they have near-stagnant economies alongside generous social welfare systems that date back to the postwar decades, when growth was still strong.
Low levels of unemployment ensured there were the tax revenues needed to pay for pensions and other benefits. The arrival of the baby-boomer generation meant there were plenty of workers for each retiree.
The US picked up most of the tab for Europe’s defence during the cold war, allowing European governments to prioritise welfare spending.
But those favourable conditions no longer apply. Birthrates have fallen, and the baby boomers are getting older. Europe is being forced to dig deeper to pay for its own defence in the face of the threat posed by Russia.
Most important of all, growth rates have slumped. Germany’s economy is no bigger now than it was before the start of the covid pandemic, five years ago; over the same period France has grown by less than 1% a year on average.
Stagnant living standards mean unhappy voters, as Mr Scholz has found to his cost. Weak growth also means governments have difficulty balancing the books, leading to pressure to cut benefits and raise taxes. As Mr Macron is finding, this approach does not go down well either.
The eurozone was not supposed to pan out like this. The rationale for the single currency when it was launched a quarter of a century ago was that it would lead to faster growth and close the gap in living standards with the US. In fact, the opposite has happened: growth rates have been weak and the gap with the US has widened.
Design flaws in the euro were obvious from the outset: it was a one-size-fits-all approach for countries that had different needs, and it was based on the neoliberal principles that low inflation and balanced budgets would deliver stronger growth. The lack of a common fiscal policy to redistribute resources from richer to poorer eurozone countries has not helped either.
The euro’s failure to deliver has had significant consequences. First, slow growth has made member states more conservative and more resistant to change. Europe has lacked the dynamism of the US and has stuck with old industries for far too long.
That is especially true of Germany, which has been painfully slow to enter the digital age and to recognise the threat to its fossil-fuel-dominated auto companies. Second, while there has been some recognition of the need for change, it is not obvious it will actually materialise.
Mario Draghi’s recent report on Europe’s lack of competitiveness is a case in point. The study identified the problems well enough: there is a lack of investment, and Europe needs to break out of its “middle-technology” trap, whereby it is stuck producing goods like cars. But Mr Draghi provided little in the way of solutions that would actually make a difference.
It is one of the curiosities of Europe’s recent economic history that every step towards a closer union — the creation of the single market in 1985, the launch of the euro in 1999 — has been followed by a weaker economic performance. The explanation given for disappointing results is not that the integration process has gone too far, but that it hasn’t gone far enough.
It is no surprise Mr Draghi says the cure for Europe’s lack of competitiveness is a top-down, EU-wide approach, but his conclusion flies in the face of evidence. The idea of “more Europe” has been tried — indeed, it has been tested almost to the point of destruction. Voters are deserting mainstream parties in their droves. It may be time to try a little less Europe before it is too late.
- Larry Elliott is a Guardian columnist