When a big country like Germany deliberately pursues economic policies that discourage domestic consumption and raise savings (which fuel investment in export industries), the result is a large trade surplus. This surplus is NECESSARILY matched by deficits on the part of its’ smaller trading partners, like Greece. Those deficits must be financed, which requires that the deficit countries – again, like Greece – borrow money from those – like Germany – who are running surpluses. Were Greece to have its’ own currency, then that currency would devalue, thus discouraging imports and promoting exports. While not a painless solution, this course would over time correct Greece’s trade deficits and allow it to begin paying back its’ creditors. But since Greece is part of the Eurozone, this is not a possibility. If Germany were to change its’ policies to encourage consumption (including imports) and discourage excessive saving, then this would also allow deficit countries – like Greece – to run trade surpluses that could be used to pay back past debts. Instead, Germany is demanding that Greece adopt harsh austerity policies that will dramatically reduce Greek consumption and restore Greek “competitiveness” via reduced wages. But for Greece to do so without major debt forgiveness and while Germany continues its’ own policies that gave rise to large trade surpluses in the first place is entirely unreasonable and unlikely to solve the problem. Greece is not without blame in the current crisis, but Germany is equally culpable, if not more so. Whenever imbalances in trade produce unsustainable debts, adjustments must be made on the part of both creditor and debtor countries.
This reality is recognized in a recent IMF analysis, which acknowledges that Greece cannot hope to pay back its’ debts even were it to accept every feature of the deal on offer from the EU. The rigid positions taken by Germany and the EU are not based upon sound economic analysis, but are instead all about preferred political outcomes: Merkel and company want to push the left from power in Greece and ensure that big governments and big banks call the shots in Europe rather than elected representatives of the people. The EU’s democratic deficit has never loomed larger than it does today.