Sechzig Minuten

Last night, 60 Minutes did a quick piece on the European Union (EU) and its financial woes.  The piece, which can be seen here, focused on the intra-EU tensions that are beginning to rise as a result of debt crisis in many of the EU’s southern member states.  It also argues that the richer EU nations are bailing out their southern neighbors in order to maintain the flawed union because they are afraid of the uncharted territory that is an EU break up. 

While this may be partially true, I disagree that it is their primary motivation.  Instead, I argue that the northern countries are fighting so hard to maintain the EU because they are benefitting greatly from its free trade zone and currency union.  A perfect example is of this concept is the country that is being painted as the villain by the southern countries: Germany.

Modern day Germany has grown into an economic power house.  It is the world’s fourth largest economy and its per capita GDP is on par with the United States and other modern, wealthy nations.  In Europe, it is the dominant economic force.  It has the largest economy in any way that can be measured: total GDP or per capita GDP.  It also routinely runs a nearly balanced national budget, which is quite an achievement in Europe these days.  Most important of all, it is the world’s second largest exporter of goods after China and ahead of the USA.

It is this last statistic that is the most important.  Like China, Germany has a huge industrial base that far outstrips its own consumer market.  It therefore needs to export huge amounts of goods to maintain a healthy unemployment rate (Germany is between 6% and 7% now) and avoid political turmoil.  This is where Europe and the EU come into play.

The EU is essentially a threefold union.  These aspects of the union are:

1.       It is a free trade zone

2.       It is a common currency zone

3.       It is moving towards political union

I could write in length about my doubts regarding the feasibility of #3, but it doesn’t matter to this post.  The first two do.  They matter because both are currently being exploited by Germany to create a captive market for its export goods. 

Germany is the EU’s most efficient economy.  Its workers are among the most efficient and industrious in the world.  Doubt me?  Google “German engineering” and see what you find.  This efficiency drives the cost of production way down for German goods.  In a perfect world, countries around Germany would respond to this efficiency by protecting their domestic firms.  This would be done through either tariffs to artificially raise the cost of importing German goods or a favorable currency exchange rate to make domestic goods appear cheaper.  

Unfortunately for Europe, the EU has taken away this option from its member nations.  Instead, they are placed in direct competition with the German economic machine.  This has resulted in a scenario where many of the EU nations run trade deficits (see my post on Greece) while Germany runs a sizeable trade surplus.  It is also why Germany is willing to bail out its European customers to keep them as captive customers for its goods and economic growth.