Groupthink and Denial on a Grand Scale
Chapter 15: The German ‘jobwunder’
The German government played a rather particular role in the shift in employment mixes in the early days of the euro. A reasonable argument can be made that Gerhard Schröder helped cause the Eurozone crisis. His government’s response to the restrictions that Germany encountered on entering the EMU are certainly one of the least focused upon parts of the story. Before the EMU, the Bundesbank had regularly left the mark undervalued in international currency markets to ensure the German export sector maintained competitiveness. The regular complaint from France and others during the EMS years was that the grossly undervalued mark forced them to reduce domestic demand and increase unemployment in order to maintain the agreed EMS parities. Upon entering the EMU, Schröder was also under immense political pressure to do something about the high unemployment in the East after reunification. Without the capacity to manipulate the exchange rate, the Germans understood that they had to reduce domestic production costs and inflation rates relative to other nations, in order to retain competitiveness. The Germans thus took the so-called ‘internal devaluation’ route, that is all the rage in Europe now, well before the crisis; a move which ultimately has made the crisis worse.
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