Economics and politics - comment and analysis
1. July 2016 I Heiner Flassbeck I Countries and Regions, Economic Policy, Europe, General Politics

The Brexit and a black Friday – in Germany

June 24, 2016 will go down in history as the Black Friday of European development. But as so often happen in such cases, the historiography remains superficial. If we want to understand what is really going on, we need to delve much deeper into the events. This Friday is not ‘black’ because a majority of the British electorate chose to leave the EU. It is the reaction of the policy-makers and the media on the continent, and especially in Germany, that made the day into a something very dark.

Beyond the excitement of the media and the politicians, there are reactions that we have noted here some time ago (see here). English politicians who have advocated a withdrawal start to realise that they have opened a Pandora’x box and even braggarts like Boris Johnson act sheepishly today. David Cameron, who has now become a lame duck, declared that he will leave the decision to formally start the exit procedures (i.e. draft the letter to the European Commission invoking Article 50) to his successor which will be elected at the Conservative party congress in early September.

European politicians on the continent, first and foremost Jean-Claude Juncker, insist on a speedy settlement of the problem: no delays will be allowed. This is of course political strategy. The EU top assumes that they have several trump cards and they want to play them quickly. Typical of the naivety of many of the Brexit advocates in the United Kingdom was an interview with a UKIP member that I watched on the BBC. He stressed that it would, of course, be no problem to hold onto free trade with the EU, after all, we are all ‘free traders.’ When the negotiations with the EU Commission start, he will very soon understand that exactly this stands in an unsolvable contradiction to the main UKIP revindication, which is to restrict immigration from the EU.

The answers of the markets were not any better. The reactions were, as almost always, devoid of intelligence and they were useless. There is no rational reason for the stock market to go down and it would be absolutely right if the Pound would fall, so that the UK finally gets a chance to decrease its huge current account deficit. Of course, precisely this is feared in Germany, because the UK is one of Germany’s most reliable debtors – the UK deficit with Germany was over € 50 billion last year, only the US, with over € 60 billion, does worse.

The only reaction that could induce fear on this black Friday was the one of the German top politicians and the German press, which is, to a very large degree, behind them. They all stood there together, vigorously and synchronously shaking their heads in disbelief about the British lack of intellect of wanting to exit this wonderful European achievement called the European Union.

It is clear that if you persuade yourself for decades that all is well because it goes well in Germany, you completely lose track. The typical German politician and journalist live in a world that does not exist. When then something happens in the real world, such as the Brexit referendum in the United Kingdom, it will be interpreted using categories of a world that is nowhere real.  Consequently, only trivial comments will be rehearsed. Only the outside realises this, those on the inside do not.

On 10 May this year, Martin Wolf, the chief editor of the Financial Times, wrote an article that cannot be beaten for clarity under the headline ‘Germany is the biggest problem of the euro zone’ (see here). Imagine that some of the British people read this article and considered the argument to be plausible. How would they have voted in the referendum last week?

How voted those in the referendum who – rightly, of course – have the impression that economic development in Europe has been catastrophic since the financial crisis? How voted those who realise that continental Europe is unable to reduce unemployment as well as to escape from deflation? How voted those who know that it is the German austerity delusion which makes resolving the economic crisis in Europe impossible, while Germany continues to defend it against all odds and all reason (see here)? How voted those who resist the reality of a German dominance in Europe, given historical experiences? How voted those who consider it morally and politically unacceptable to force a small country like Greece to accept a series of insane policies against the will of its people – regardless of what preceded it?

Do those who voted for the Brexit believe that, perhaps a British government can end or ease austerity, while the fatal policies of the European Commission and the European Council that force the 28 member states into neoliberal austerity can never be surmounted? Do those who voted for the Brexit understand that the largest country in the European Union is not only incurably mercantilist, but also stubbornly refuses to talk about it at home and address the problem with any other member states? Are those who voted to leave aware that a socialist French president is destroying his country because he frantically and against all odds and reason tries to copy Germany? Do those who voted for the Brexit realise that the other countries, even the big ones, are simply too weak to openly oppose Germany and that today they steer towards their own nationalist adventures that can tear apart Europe sooner or later?

How absurd the German response to the Brexit is in actually – I must unfortunately say – can be best shown by the reaction of two social democrats, Sigmar Gabriel and Martin Schulz. Both want to rethink and ‘re-establish’ Europe and create a Europe that is ‘close to its citizens’ (the communiqué can be found here). Spiegel online had the following to say about the text:

“SPD leader Gabriel and EU Parliament President Schulz unsparingly analyse the EU crisis in a new paper. The central argument consists of their ten-point plan: an economic Schengen – and more Europe.’’ ‘Unsparingly’ – that is what a leading German media outlet calls an analysis which tries to achieve nothing else than to sweep the crucial question about what constitutes the real problem in Europe under the carpet. Gabriel and Schulz write :

“The basic problem in Europe today is major economic and social divergence. Some Member States – including Germany – are doing economically well. Other countries stagnate and the risk of a resurgence of the debt crisis is not gone. There is too much inequality, particularly at the expense of youngsters, the unemployed and those who are precariously employed. These signs of polarisation do not only endanger the cohesion of societies, they also weaken the growth potential of the economy. The key challenge is to meet this increasing divergence and inequality with a dynamically growing and more social Europe. To overcome these problems, we need to tackle the causes of European stagnation and divergence.”

What Gabriel and Schulz write is completely correct! But what are the causes of this divergence? Where does growing inequality come from and what have the German social democrats got to do with it? It seems that they have nothing to do it with. They take no responsibility. Everything else in the paper is just mere political talk. Of course, on the Left there also EU opponents who have nothing else in mind than – regardless on any objective analysis of the situation in the EU – to pull the national card at every occasion (see Martin Höpner for a critical analysis of this sad phenomenon).

The ‘unsparing analysis’ of the top of the social democracy fails to mention that it were the German Social Democrats, who, from the start of the European monetary union, have betted on the most primitive of all economic policies: wage dumping, wage flexibility (and increasing inequality) and mercantilism. It is exactly those factors which have dealt the EMU an early deathblow. The ‘unsparing analysis’ also fails to mention of course that it is the Social Democrats who currently endorse the whole neoliberal madness as part of a grand coalition. The German position creates enormous economic and political damage, including the Greek tragedy. And their ‘unsparing analysis’ omits the fact that the social democrats have refused to engage into any serious discussion about German mercantilism and the German current account surpluses.

Those who present such ‘unsparing analysis’ and propose to ‘re-establish’ Europe will cause a lot more countries to leave the EU and the monetary union. More and more people realize that with a Germany that stubbornly refuses to give up its mercantilism and its absurd conception of the role of the state in economic and financial policy, Europe cannot be saved.