It’s too late for other Europeans to be as efficient as Germans

Over the last few years, we have become familiar with the fiscal analysis of the problem. We are told that it was all about the failure to uphold the Maastricht Treaty, and the profligate spending and borrowing of Portugal, Spain, Italy and Greece. And that is certainly true, in the sense that the eurozone’s unsuitably low interest rates did allow those countries to rack up debts it is now clear that they cannot afford. But that debt problem is at least partly a function of the way the euro works, as a monetary union in which devaluation is impossible. It all boils down to unit labour costs — and unit labour costs are determined, I am afraid, by national stereotypes that have a unfortunate grain of truth.

Let us imagine that there are two factories, producing similar cars, and that one factory is German and one is Italian. Let us suppose that to assemble and spray each unit costs 1,000 euros in both factories — at least to begin with. Over time, however, history teaches us that the German factory will start to reduce unit labour costs. Without compromising quality or reliability, the German factory will start to find ways of speeding the process up. By investing in the skills of the workforce and in high-tech capital equipment, they will find a way of reducing the unit labour cost to 900 euros. At which point, the Italian factory faces a crisis. They can cut costs themselves, but without the gains in productivity – and face the risk that the car will be correspondingly shoddier and that they will be rumbled by the consumer. Or else they must face the awful reality that the more-efficiently produced German machine will start to devour their market.

Now in the old days, before the euro, there was a simple solution that allowed the Italians to keep producing cars of the same quality and to keep unit costs down. It was devaluation, and if you look at the post-war career of the lira (and just about every European currency) against the Deutschmark, you can see how it worked. As the mark appreciated, it was more expensive for Italians to buy a German car; and as the Italian currency fell, Italian cars remained a good buy in Germany. The tragedy now is that this option is closed off for the eurozone members — and look at the Italian car industry.

Manufacturers can no longer use the lira to compete on price, and they are being utterly stuffed. Italian car sales fell 15.3 per cent in December, while sales of German cars grew 8.8 per cent. The Italians now produce fewer cars than we do, and their markets are being relentlessly gobbled by Audis and Beemers and other beautifully engineered machines from Germany. None of this is in any way to disparage the post-war German achievement; indeed, it can be taken as an argument that we other European countries should have learnt to be much more like Germany.

We should have invested in skills and education, and in capital equipment, and in all the things that make the Germans so productive and that keep their unit labour costs so low. And in an ideal world the fierce teutonic discipline would now force the rest of Europe to shape up, in the way that Angela Merkel described in her bracing speech in Davos. Over a few decades, that is indeed what might happen. The hard necessity of slugging it out toe to toe with German workers might eventually transform the productivity of the Italians and others, so that they matched the Germans in sheer focus and efficiency and all-round Vorsprung durch Technik. The trouble is that this extra pressure is being placed on the eurozone periphery countries, at exactly the moment when Europe as a whole is facing a massive double-squeeze.

The challenge of Asia means that European welfare, pensions and employment standards will be increasingly hard to sustain, and the straitjacket of the euro is preventing the periphery countries from devaluing and going for growth; so more people are thrown out of work, welfare bills rise, debts grow — and Brussels demands more austerity, in a vicious circle of pain. All the while, German exports power ahead. The price of splitting up the euro may indeed be tremendous. But what is the long-term cost of keeping it together?