How Germany Won the Euro Crisis

And Why Its Gains Could Be Fleeting

German Chancellor Angela Merkel, May 15, 2013. Michaela Rehle / Courtesy Reuters

German Chancellor Angela Merkel must be in a mood to celebrate. Not only has the German economy bounced back from the 2008–9 financial crisis -- with revitalized export industries and record-low unemployment -- it has done so while most other European economies are still reeling. Where other countries see only economic hardship in their future, Germany sees an influx of skilled immigrants, low borrowing costs, a balanced budget, and a growing housing market. All of that is a boon for the German economy -- and for Merkel, who is up for reelection in September.

The common wisdom is that Germany’s success is the hard-won reward for strict economic management. Yet fiscal conservatism and structural reforms alone do not account for Germany’s export-led growth, which in fact is largely the product of adjustments in business and labor relations that reinvigorated German industries. The country also owes much of its economic rebound to the specific structure of the European Monetary Union and even to the labor and financial fallout of the eurozone crisis. Immigrants and investors’ cash are flowing into the country from the rest of Europe, in order to escape the dire conditions that Merkel and EU technocrats helped create through their hard-line focus on austerity, structural reforms, and price stability.

Merkel’s drive for austerity is a risky bet. Although it seems to be working to Germany’s advantage, it has failed to lift up a recession-hit Europe. But Germany benefits from an economically healthy Europe, to which it exports roughly 40 percent of its products. Already, automakers such as Daimler and Volkswagen are starting to worry about weak European sales. A crumbling eurozone, therefore, both threatens the very existence of the monetary union and makes the German economy dangerously dependent on demand from emerging markets. Greater recognition of these vulnerabilities -- and of the ways in which the German economy has benefited from the status quo -- should budge reluctant German policymakers away from austerity toward growth-oriented policies for the

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