As worries rise that the eurozone is slipping into recession, it's clear Germany is doing way better than its neighbors. Today, the country has low unemployment, very low inflation, a large trade surplus and a balanced budget. By contrast, most members of the Eurozone are stagnating, while some are going through a catastrophic recession and suffering from debilitating unemployment. The German government says that its own success and its neighbors’ failures are unrelated; that poor performance is due to poor decisions. Yet, even though the policy failures are real enough, this analysis is false.
Germany has for many years pursued a policy of wage suppression, which many economists have described as a competitive devaluation or ‘beggar thy neighbor’ policy. Germany’s gains in competitiveness were immediately translated to gains in trade, since the freedom of goods, services, persons and capital allowed German products to circulate freely and quickly throughout the European Union. These are the fundamental freedoms of EU law and are vigorously protected by the European Court of Justice. German policy would not have been successful without them
Germany has also benefited from the fixed exchange rate that the Euro effectively secures between itself and its major European markets. This means that its export boom was not offset by a rise in its own currency. If Germany had been outside the Euro, currency appreciation would have hurt Germany’s gains. Not so in the Eurozone.