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The German ant and the Italian entrepreneur

When Italy and Germany signed up for a monetary union they locked their exchange rate at a fixed unchangeable level. They did not however sign an agreement to lock also to a set level their relative competitiveness, in the world market, of their exports.  Simply because that one does not only depend on the exchange rate, but on the relative cost performance of firms in producing a given good or service. Lower unitary costs imply the capacity to sell a given good at a lower price than your rival without sacrificing profits, to the contrary. That cost factor depends critically on two items: labor costs per unit of time and productivity per unit of time. Knowing how many hours it  takes to that worker build a washing machine, and the cost of that worker tells you almost all you have to know about the e of that firm. Well, the beauty of data is that they speak clearly to us. Germany, in the past 10 years, has outperformed us immensely  on both fronts: wage moderation and productivity growth. It has therefore been able to expand its exports much more than Italy has, through greater competitiveness of its sales. Let us just for the sake of it compare this story to a famous fable:  Italy is the profligate cricket and Germany the thrifty ant (La Fontaine, I think. We needed to introduce a French element into the story, noblesse oblige). Well, guess what. Winter has come. Indeed, like in the fable, to avoid dying the cricket is asking help to the ant. And the ant is not responding.

And maybe the ant is not totally wrong to remain silent. Here let me transcribe (translated by me) a mail I received yesterday  by an Italian entrepreneur that works in Germany and feels depressed about the state of affairs of his country: “The Merkel approach might be wrong but one thing it achieves. It makes us aware of the many mistakes we have done and we keep on doing and to which we need to remedy. Corruption, irresponsible trade-unions, demagogues, no meritocracy, a wasteful approach to the welfare state helping shirkers to get by, a political elite that throws away public money to be kept in peace while it keeps on stealing. Add to that the underground economy, the mafia, and so much else, what can 2 euro help us with? Devalue and grow again? Sure, but if  you don’t pursue these pathologies you can’t solve the riddle, also because none wants to work anymore. … Firms and managers steel too. Maybe I am a bit too pessimistic . If we were to reduce by 30% all those problems those few that work seriously would push by themselves the country out of this quagmire. Have you heard recently someone speaking about reducing expenditures? Only about raising taxes. Mr. Monti too. Why not cut unemployment benefits after 2 years? Why not make public procurement work better? Is anybody interested in solving these issues? Maybe we really need tiger moms and the Germans that push us back to work!

I do agree, before talking badly about the Germans let us spend some time in focusing on our responsibilities. One question remains: how do we get out of it? Reflate the European economy, push it to produce and employ now, not in 10 years time. The only able that can do that is the German ant. Many do agree that Germans consume little and save a lot  and that revamping domestic demand in Germany would save the profligate cricket. We cannot ask German citizens to consume more and save less, but Mrs. Merkel could lower taxes on German families so that they consume voluntarily more. Most of all, it can increase public  expenditure so as to boost in this phase German incomes and, with it, consumption across Europe.  We are basically asking to the  Germans to do what they 20 years ago for the poor and unproductive East Germans. I personally doubt they want to do it, we are not their brothers, nor cousins like the Dutch and the Belgian, nor respectable counterparts like the French. If, however, Germany were to change its mind and with it save us and the euro as we know it today, with policies that are the contrary of what stubbornly recommended still today by the European Commission and Germany itself – that is if they were to embark on a expansive and not restrictive fiscal policy program -  our debt (not public debt, but moral debt) toward Germany would be of immense proportions and should be repaid with those reforms mentioned above by the Italian entrepreneur (the issue not being let’s not do reforms, but in the meantime let’s push the economy). We would need a different set of politicians capable of not saying yes to anything that is proposed by Brussels but with a sense of direction, of history, of pride for our past, betting and building a new Renaissance.

If, as I expect them to do, Germany will not do this, we will devalue and  the euro will collapse. No Renaissance, but Reconstruction, just like after a war. It will be a difficult moment. For us, but even more for Europe. Suspicion and tensions between countries that have separated will be strong and dangerous. As Caracciolo said (my translation):  “no one in Europe will come out stronger from this storm. What is essential is to save what can be saved of our democracies, of our values, of our civilization. Making sure that those devastations – due to out of control finance, structural deficiencies of the euro and the lack of legitimacy of the political class – will be capable of revamping the monsters of the past, of authoritarian racism. Because against those, there are no eternal vaccines.” I do agree.

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