Federal Europe: Should we blame Germany ?
" Greece cannot compete with Germany; but need it?"
Germany tends to export more to the world than it imports from it, so, while Germany runs a trade surplus, its trading partners have to run a deficit. This attitude to trade is termed mercantilism and was common throughout Europe from the Middle Ages to the Enlightenment, whereupon in most of the developed world Free Trade gradually won the day with more complex models and mechanism for balancing the value of trade. However, in Germany a liking for mercantilism lingered and, some say lingers still [Sergio Cesaratto, Antonella Stirati, (2011) "Germany and the European and Global Crises"; n. 607].
Tied to the mercantilist notion of a positive trade balance, is the notion that the accumulation of bullion constituted the accumulation of wealth in a country. Mercantilism (as its name implies) is the product of merchants, and to some extent of the Civil Service. In the heyday of European mercantilism (1340-1789; or from the Black Death to the French Revolution) mercantilism made a certain amount of sense. A trade deficit meant that a country ran out of gold. Without gold it could not field a significant army. If you could out-trade your competitors, you could probably vanquish them in the field as well, exclude them from markets, seize their colonies, etc.; the British have done all these. The highly competitive commercial policy of mercantilism goes 'hand-in-glove' with an equally aggressive foreign policy.
The attack on mercantilism was the work, not of remorseful merchants, but of philosophers and theorists (Locke, Hume, Smith, Ricardo). Mercantilism is today regarded (generally if not universally) as in error. Trade need not be a 'zero-sum' game in which the gain of one is the loss of another; it is now accepted that it is possible for trade to benefit both parties. Furthermore, Adam Smith also argued that the accumulation of bullion does a country no more good than an accumulation of peppercorns; bullion is just another commodity. As gold flows out of a country its value will rise; similarly its value will fall in a country where there is a net export of goods (and thus import of gold).
But, let us return to 20th century Europe, and test the notion that Greece and Germany cannot co-exist in the Euro. Before the introduction of the Euro the currency markets would quickly bring the system into equilibrium. With excessive import of German goods, the value of the Greek drachma would sink relative to the D-Mark, making German exports to Greece prohibitively expensive. The Eurozone removed this automatic 'regulator of trade' and 'balancer of budgets'. No longer would Greece automatically stop buying German cars when it ran out of D-Marks.
What should have happened is that, as Greece ran out of Euros, their value in Greece should have risen; Greek salaries expressed in Euros should have fallen. However, the opposite happened; the Greeks (perhaps looking at salaries and wages in the rest of the Eurozone) let their own wages rise much faster than the Eurozone average.  Trade balance was lost, and money flowed out of the country. Fiscal balance was lost and the Government borrowed. Why not?
Against borrowing the natural control is interest rate. Excessive borrowing raises interest rates, but by two different mechanisms; as lenders fear their debtors will devalue, and as lenders fear their debtors will default. Greece in the Eurozone cannot devalue; so interest rates were initially low, and debt accumulated. There seems also to have been a deliberate hiding by the Greek government of the real level of government debt. Now that proper EU scrutiny has been made, the markets and rating agencies seem to consider default likely. That might be the best option. Those who protest against default are probably the creditors who would lose the money they should never have lent in the first place. In the meantime the ECB and IMF authorities have imposed severe austerity measures, capping salaries, etc. Unfortunately, cutting public salaries by 20% cuts tax revenue by more than 20%. The debt:GDP ratio grows worse.
This fiasco need not have happened, and need not happen again. The Eurozone is a new concept, and there is much to learn. The main point I am making here is that because Greece cannot devalue the external value of the Euro to promote exports it must learn to revalue the internal value of the Euro; i.e. change internal prices and salaries.