Advanced Search
MyIDEAS: Login

A Germans’ dilemma: save the euro or preserve their socio-economic model


Author Info

  • Luigi Bonatti


  • Andrea Fracasso



The first part of this paper describes some peculiar features of the German socio-economic model and argues that there is a widespread consent in Germany on preserving it in the face of global, European and national challenges. Essential components of this model are the export-oriented manufacturing sectors specialized in the production of those capital goods and consumer durables in which Germany has traditionally enjoyed a comparative advantage. Painful reforms were implemented in the first half of the 2000s, a period in which Germany exhibited lower GDP growth than the countries of the euro-periphery (with the exception of Italy) with a view to strengthening the international competitiveness of these sectors and the German ability to penetrate the fast growing emerging markets. The second part of the paper treats the intra-euro imbalances and discusses the thesis according to which the creation of the euro ended up acting as an asymmetric shock that put in motion a process of real divergence between the member countries, exacerbating the historical core-periphery divide. Paradoxically, this divergence was fed by the optimistic conviction that the elimination of the nominal exchange rate as an instrument of adjustment within the euro area would have forced the peripheral European countries with a history of higher price and wage inflation to uniform their price and wage dynamics to the more disciplined core countries like Germany. Indeed, it was this expectation that convinced the financial markets to neglect country-specific default risks, thus leading the interest-rate spreads between core and periphery securities at record low levels. In its turn, the availability of cheap and abundant credit permitted the peripheral countries to postpone the structural reforms necessary for long-lasting convergence in productivity levels and competitiveness, to interrupt the effort aimed at lowering the public debt-GDP ratio, and to expand domestic demand to the benefit of importers and non-tradable sectors of the economy (in particular, of the construction sector). The elimination of significant intra-euro interest differentials facilitated the large capital outflows affecting Germany from the introduction of the euro, which are deemed to be among the main culprit of the stagnant real wages and low growth characterizing the country in the first half of the 2000s. Part three addresses some implications of the crisis that broke up in Europe after that the revelation concerning the true entity of Greece’s public deficit had provoked a drastic change in market sentiment and a more pessimistic assessment of the default risk inherent in the debt of peripheral countries. In particular, this part discusses the economic rationale underlying the popularity among German commentators and public opinion of the moral hazard issue related to the bailing-out of the peripheral countries. This discussion allows us to outline the dilemma faced by the German authorities in dealing with the choice between incurring the relevant costs implied by the virtual renunciation to the no-bailout principle and the dissolution of the euro. To shed some light on the terms of this dilemma, the paper seeks to clarify how the German objective to remain also in the future a leading player in the world economy and to preserve its socio-economic model may be compatible with the political need to accommodate the requests of its stagnating euro-periphery partners and save the euro. The concluding remarks summarize and elaborate more on the implications of the dilemma mentioned above.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 1207.

as in new window
Date of creation: 2012
Date of revision:
Handle: RePEc:trn:utwpde:1207

Contact details of provider:
Postal: Via Inama 5, 38100 Trento
Phone: +39-461-882201
Fax: +39-461-882222
Web page:
More information through EDIRC

Related research

Keywords: European imbalances; Macroeconomic divergence and adjustment; Germany; Political economy of structural change; Social market economy.;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Sergio Cesaratto & Antonella Stirati, 2010. "Germany and the European and Global Crises," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 39(4), pages 56-86, January.
  2. Clovis Kerdrain & Isabell Koske & Isabelle Wanner, 2010. "The Impact of Structural Policies on Saving, Investment and Current Accounts," OECD Economics Department Working Papers 815, OECD Publishing.
  3. Philip R. Lane, 2006. "The Real Effects of European Monetary Union," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 47-66, Fall.
  4. Anna Ivanova, 2012. "Current Account Imbalances: Can Structural Policies Make a Difference?," IMF Working Papers 12/61, International Monetary Fund.
  5. �scar Jord� & Moritz Schularick & Alan M Taylor, 2011. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 340-378, June.
  6. Frank M. Fossen & Davud Rostam-Afschar, 2013. "Precautionary and Entrepreneurial Savings: New Evidence from German Households," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(4), pages 528-555, 08.
  7. Éloi Laurent & Jacques Le Cacheux, 2007. "The Irish Tiger and the German Frog: A Tale of Size and Growth in the Euro Area," Documents de Travail de l'OFCE 2007-31, Observatoire Francais des Conjonctures Economiques (OFCE).
  8. Claudia M. Buch & Jörn Kleinert & Alexander Lipponer & Farid Toubal, 2005. "Determinants and effects of foreign direct investment: evidence from German firm-level data," Economic Policy, CEPR & CES & MSH, vol. 20(41), pages 52-110, 01.
  9. Lukas Vogel, 2011. "Structural reforms and external rebalancing in the euro area: a model-based analysis," European Economy - Economic Papers 443, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  10. Fabrizio Coricelli & Andreas Wörgötter, 2012. "Structural Change and the Current Account: The Case of Germany," OECD Economics Department Working Papers 940, OECD Publishing.
  11. Gunther Schnabl & Stephan Freitag, 2012. "Determinants of Global and Intra-European Imbalances," Global Financial Markets Working Paper Series 25-2011, Friedrich-Schiller-University Jena.
  12. Sebastian Barnes & Jeremy Lawson & Artur Radziwill, 2010. "Current Account Imbalances in the Euro Area: A Comparative Perspective," OECD Economics Department Working Papers 826, OECD Publishing.
  13. Carlin, Wendy, 2012. "Real exchange rate adjustment, wage-setting institutions, and fiscal stabilization policy: Lessons of the Eurozone’s first decade," CEPR Discussion Papers 8918, C.E.P.R. Discussion Papers.
  14. Hans-Werner Sinn, 2010. "Rescuing Europe," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 11(SPECIALIS), pages 1-22, 08.
  15. Krautheim, Sebastian, 2009. "Export-Supporting FDI," Discussion Paper Series 1: Economic Studies 2009,20, Deutsche Bundesbank, Research Centre.
Full references (including those not matched with items on IDEAS)



This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:trn:utwpde:1207. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Luciano Andreozzi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.