ABSTRACT

The Euro Area is still suffering from two crises. The first is the ‘Great Recession’ following the financial market crisis. This financial crisis originated in the USA but became a global phenomenon and spread from the financial markets to the real economy. It hit many economies hard, especially the Euro Area. In 2009, OECD GDP fell by 3.6 per cent and Euro Area GDP declined by 4.4 per cent (data from http://stats.oecd.org). As a follow-up to this crisis, a second crisis has developed, the so-called sovereign debt crisis of the Euro Area. After the financial market crisis, both the financially unstable banking system and the economic downturn required massive state interventions. The governments went considerably into deficit in order to stabilise the banking system and the economy. This together with national failures of the past and the specific institutional constellation of the Euro Area paved the way for rising debt-to-GDP ratios in all countries of the Euro Area (Horn, Joebges, Niechoj et al., 2009; Joebges and Niechoj, 2010). The political reaction to this second crisis is well known (Niechoj and van Treeck, 2011; Ederer, 2012). Austerity measures are employed in nearly all countries of the Euro Area. The European Central Bank is purchasing government bonds in order to stabilise the market. Moreover, the institutional framework has been modified: a European stability mechanism to provide credits for governments in dire straits has been established, the Stability and Growth Pact has been reviewed and amended by a macroeconomic imbalances procedure and further changes to guarantee sound public finances and a reduction of European current account imbalances, and a fiscal compact to prevent further debt crises has been introduced. Both the sovereign debt crisis itself and the seeming cure of it, the austerity measures, led to a prolongation of the partly stagnant, partly recessive development in Europe after the financial market crisis. During the two crises, some export-oriented countries performed relatively well in comparison to the rest of the Euro Area. In this chapter, I will focus on Germany which is one of these countries and, having the largest economy in Europe, strongly influences – only due its mere economic power – the development of the

Euro Area. The main characteristics of its growth model are export orientation and stable industrial relations, which guaranteed low strike intensity and moderate wage developments in the past. It seems that this model is a successful one other countries should follow. In Germany, employment increased after 2009, German government bonds are in great demand and since 2011 public deficits have fallen below the 3 per cent criterion of the European Stability and Growth Pact: a situation other countries like Spain or Portugal, not to mention Greece, can only dream of. Recommending Germany as best practice for the Euro Area requires at least three qualifications: First, that Germany itself benefited from its growth model; second, that there are no negative side-effects on other European countries; and third, that this model can be generalised and successfully adapted by all European countries. Otherwise, copying the German model in other countries would not increase prosperity in the adopting country, it would deepen the crisis in the Euro Area instead of helping to overcome it and an implementation of the German model would conflict with institutions and conditions in the country in question. As will be shown, the validity of all these three prerequisites is doubtful. To substantiate this, the next section starts with an overview of the economic development of the German economy since the start of the monetary union. Then, the German growth model is explained and put in context, i.e. the institutional setting of the Euro Area. A further section reviews successes and failures of the German model and discusses the effect on other European countries, especially the emergence of intra-European current account imbalances. Against this background, an assessment of the policy approach of the German government is provided in a subsequent section. The last section concludes.