I. The Economic Burden and Structural Weaknesses After German Reunification
Germany achieved reunification in 1990, but it came with enormous economic burdens. West Germany was a global manufacturing powerhouse, whereas East Germany had a deteriorated socialist economic system, and the productivity gap between the two regions was extreme. To bring East Germany up to the level of the West, the German government undertook large-scale fiscal spending and poured massive resources into unifying social welfare, education, and infrastructure systems. This process placed heavy pressure on Germany’s public finances, and combined with the rigidity of its labor market, the German economy experienced a rapid slowdown throughout the 1990s.
A well-known expression used to describe this period is “The sick man of Europe (Europas kranker Mann).” Due to high wages, a strong Deutsche Mark, and the costs of reunification, Germany was losing manufacturing competitiveness, and unemployment was rising quickly. German companies responded by relocating production facilities to Eastern Europe to escape high-cost structures, but on a national level, the country fell into a prolonged stagnation.
Notably, after the Plaza Accord—an agreement among five countries (Germany, Japan, the U.K., France, and the United States) at the Plaza Hotel in the United States—the value of the Deutsche Mark, yen, pound, and franc was deliberately raised. In Japan, the appreciation of the yen severely hurt exports, prompting companies to shift from product competitiveness toward investment in real estate and stocks. In Germany, this period marked the beginning of its pursuit of joining the euro.
Germany’s strategic choice for overcoming these structural issues was the adoption of the euro. By abandoning the burden of the strong Deutsche Mark and embracing a common currency with a lower value, Germany sought to regain export competitiveness.
II. The Economic Reasons Germany Actively Pushed for the Euro
At 00:00 on January 1, 2000, Germany officially adopted the euro, marking the beginning of an era in which Germany became one of the key leaders of Europe. Cheap natural gas flowed in from Russia, significantly reducing energy costs, and inflation remained well controlled. During this time, Europe shifted its vision from division to integration, and globalization became a widespread theme across many countries.
Although the euro was a symbol of political integration, economically it was highly advantageous for Germany. The Deutsche Mark had long been the strongest currency in Europe, and as a result, Germany had to endure the disadvantages of an unfavorable exchange rate. As an export-oriented nation, a strong currency directly weakened Germany’s price competitiveness. Moreover, with the heavy fiscal burden of reunification, maintaining a strong currency framework became increasingly difficult.
The adoption of the euro provided Germany with two major benefits:
First, the euro—valued lower than the Deutsche Mark—greatly supported Germany’s export industries.
Second, with all eurozone countries bound to the same interest rate and exchange rate system, Germany secured a lasting competitive advantage.
Once the euro was introduced, German companies regained price competitiveness under the lower exchange-rate burden, and the country’s manufacturing-centered economic structure recovered rapidly. In contrast, Southern European countries experienced the opposite trajectory.
III. The Structural Causes of Southern Europe’s Manufacturing Collapse under the Euro
The core problem of the euro is that all member states use the same monetary policy while their levels of industrial competitiveness differ greatly. Historically, Southern European countries maintained export competitiveness and eased economic downturns through currency devaluation. However, after adopting the euro, Greece, Portugal, Spain, and Italy lost the ability to adjust their exchange rates independently.
The fact that Germany and the Southern European countries share the same currency produced the following outcomes:
- Germany benefited from a lower-valued euro, which promoted its exports.
- Southern European countries, whose manufacturing sectors were weaker, were forced to compete directly with German products.
- Manufacturing firms in Southern Europe with lower competitiveness were rapidly driven out of the market.
- These countries shifted into a structurally persistent current-account deficit, with imports increasing and exports declining.
Spain and Portugal had economies centered around light industry, while Greece had a fundamentally weak industrial base. These countries were unable to compete with manufacturing powerhouses such as Germany, the Netherlands, and Austria. As a result, their industrial structures began shifting toward sectors like tourism and real estate.
IV. Changes in the Industrial Structure of Southern European Economies: From Manufacturing to Dependence on Tourism and Real Estate
After integration into the Eurozone, Southern European countries rapidly shifted from manufacturing-based economies to those centered on services and tourism, having lost their industrial competitiveness. Tourism is useful as a source of foreign currency, but it is highly seasonal and does not easily create stable employment. Furthermore, the expansion of tourism, combined with real estate speculation, triggered a surge in housing and property prices.
In particular, the following trends emerged:
- A surge in demand for hotel and resort development
- Large-scale purchases of Southern European real estate by foreign capital
- Rapid increases in property prices in central urban areas
- Deepening gentrification
- Labor market instability caused by the loss of manufacturing bases
Tourism-centered cities such as Costa del Sol in Spain, Santorini in Greece, and Porto in Portugal seemed to experience economic vitality as real estate prices soared, but this was an extremely fragile model of growth.
Furthermore, European real estate is not based on producing goods, but is highly exposed to external influences. Rather than office buildings needed for manufacturing, the market depended on tourists arriving from abroad, making it vulnerable to exchange rates and other external factors. Interestingly, because the exchange rate was fixed under the euro system, there were periods when these regions earned even more money. And during that time, the global economy was strong.
However, an economy dependent on real estate collapses easily under external shocks. And that shock began in 2008, in the United States.
V. The Lehman Brothers Crisis: A Direct Blow to Southern Europe’s Vulnerable Economies
The 2008 bankruptcy of Lehman Brothers collapsed the global financial system and spread a plunge in real estate prices and a tightening of credit across the world. Southern European economies, excessively dependent on tourism and real estate, became some of the most severely affected regions worldwide.
The collapse of the U.S. real estate market transmitted the following shocks to Southern Europe:
- A sharp decline in global real estate prices
- A steep drop in the number of tourists
- A decline in foreign investment
- A surge in Southern European sovereign bond yields
- The bursting of real estate bubbles due to bank credit freezes
Spain was already suffering from a severe real estate bubble, and after the Lehman crisis, property prices plummeted, shaking the banking system itself. Portugal and Italy also experienced a rapid drop in economic growth rates due to declining tourism demand, and unemployment surged.
Among them, the country with the most vulnerable structure was, without doubt, Greece.
Greece’s manufacturing sector was virtually destroyed due to Germany’s entry into the euro system, and alongside tourism, the country expanded public employment through national employment programs, increasing the number of civil servants and public-sector workers. At the time, many in South Korea claimed that Greece collapsed because of populism, and many politicians criticized welfare policies by lumping them together as “populist policies.”
VI. The Greek Sovereign Debt Crisis: Structural Vulnerabilities Created by the Euro
After adopting the euro, Greece significantly expanded its government debt thanks to cheap interest rates. Because the country could use the same interest rate as Germany under Eurozone integration, the Greek government fell into the illusion that its debt burden did not pose a problem. However, unlike Germany, Greece had virtually no manufacturing base, and its economy had an excessively large public sector.
After the Lehman crisis triggered global credit tightening, investors began to question Greece’s fiscal condition. Bond yields surged, and the country effectively fell into a state of default. Greece’s national debt reached 180% of GDP, and the government struggled even to pay wages and pensions.
The factors that further worsened the Greek crisis were as follows:
- The inability to devalue its own currency
- The impossibility of using exchange-rate policy to restore competitiveness
- Having no option other than austerity measures
- Excessive dependence on European creditor countries such as Germany
In the end, Greece was forced to accept extreme austerity policies in exchange for bailout funds from the EU, ECB, and IMF. This led to skyrocketing unemployment, the collapse of economic growth, and reductions in welfare, further deepening instability throughout society. In particular, Greece had borrowed large amounts of money from Germany, and when Chancellor Angela Merkel met with the Greek prime minister, Greek media focused heavily on how much of the debt Germany would forgive.
VII. How Germany Became the Biggest Beneficiary of the Euro
The euro provided Germany with structural advantages that were close to perfect. As a global manufacturing powerhouse, Germany benefited from a low exchange rate, and its exports grew as consumption increased in Southern Europe. German banks lent massive amounts of money to Southern European countries, and the consumption in these countries translated into increased imports of German products.
In other words, Germany profited in two major ways:
- Strengthened export competitiveness due to the euro
- Interest income earned by lending capital to Southern European countries
Meanwhile, Southern European countries lost their manufacturing bases and accumulated debt instead. The European single currency system ultimately strengthened an internal “Germany-centered economic structure”, widening the gap between Southern and Northern European countries. As a result, capital that should have been distributed across various European nations increasingly flowed into Germany, strengthening Germany’s influence while also increasing its obligations within the Eurozone. However, Germany focused more on solving its own domestic issues rather than fulfilling broader obligations.
In particular, following the Syrian civil war, Germany spent significant portions of its budget on immigrant welfare programs and became the European country that accepted the largest number of refugees.
VIII. Conclusion: The European Economic Crisis Originated from the Structural Contradictions of Monetary Integration
German reunification → the burden of a strong Deutsche Mark → the introduction of the euro → the recovery of German manufacturing → the collapse of Southern European manufacturing → dependence on tourism and real estate → the shock of the Lehman crisis → the collapse of Southern European economies → the Greek sovereign debt crisis
This series of events is not simply a list of incidents but a single connected flow that originated from the structure of European monetary integration.
Europe uses a single currency, but its economic structures, competitiveness, and industrial bases are completely different. These differences are revealed in extreme ways during times of crisis and create the vulnerabilities of the European economy. Germany became the biggest beneficiary of the euro, and Southern Europe had to walk the opposite path.
For Germany, the euro became a powerful export engine, but for Southern Europe it became the structural cause of manufacturing collapse and debt crisis. This problem is still unresolved and remains the most important variable that will determine the future direction of the European economy.
After this, in the United States, Bernanke implemented a zero-interest-rate policy through unlimited monetary policy, and together with zero interest rates, the appearance of MMT theory led to the evaluation that unlimited monetary policy was absolutely correct. However, this acted as a factor that sent European talent to the United States again, and now, many young and capable talents in Europe are going to the United States.