June 19, 2012

Germany’s Mercantilism Proves Burdensome to Southern Europe

This is the second in our series of blogs on the Eurozone crisisThanks to Troy Warwick for the analyst coverage.

While current financial crises seem to be worsening in Europe, Spain and Greece in particular, it is interesting to note that the economic issues the eurozone is facing bear striking resemblance to a much older European tradition. It may be a cliché, but it really does seem like history is repeating itself, as the German economy is adopting a similar strategy to a post-feudal, mercantilist Europe.

Mercantilism is the opposite of a laissez-faire financial system. The tenets of mercantilism state that a harmonic and mutually beneficial financial system is unnatural and therefore must be managed by political force. Its hallmarks focus on the accumulation of trade surplus, full employment with low wages, and maximized production with minimized consumption. Power is considered relative, as a gain to another country is automatically considered a loss to the other per a zero-sum game. These policies helped shape the European powers such as Spain, Portugal, Britain and France through the accumulation of bullion. Using imperial colonies as methods of garnering raw material, and then selling processed goods back to said colonies, allowed each of these counties to gather massive amounts of wealth and power in the past.

Since its unification, Germany has always seemed to have a slightly mercantilist policy. After the Second World War, German authorities saw the only way to increase the national economy was to focus on state-building and industrialization. This also brought along the advent of Germany’s export-based economy. When the oil crises of the 1970s struck, Germany became even more mercantilist. The results of the oil-shock found Germany implementing policies such as wage moderation and fiscal restraint, in turn creating a low inflation rate. This was used to the Germans’ advantage during the creation of the EMS and later the EMU. In fact, this favorable inflation rate differential was one of the leading causes in the decision to use the Deutschmark as the currency of the EMS.

Much like how Spain and Portugal used their Latin American colonies to gain large amounts of bullion, so has Germany used the peripheral eurozone counties to build its own wealth. These results are hardly surprising—mercantilism has always historically led to a strong imperial nation (Germany, in this case) and many smaller, weaker colonies (i.e., Southern European countries). Indeed, Germany’s mercantilism has been seen as a co-contributor and even a trigger for the current crisis in Europe.

Does Germany have more to lose than any other E.U. member nation if the euro is dissolved? Yes—simply because it has more of everything. I expect Merkel to do whatever is necessary to keep the E.U. intact, even though her current stance appears against eurobonds seems rigid.

Next up: What will eurobonds mean for Europe?

See all the blogs in our multipart series on the Eurozone crisis.

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