This is a post related to a wider discussion in the Econ blogosphere (and its not really an argument so much as an accumulation of evidence). German economic, fiscal, and trade policy is likely harmful to the world, especially to the Eurozone periphery. The Gloomy European Economist elaborates:
Following the widely discussed U.S. Treasury report on foreign economic and currency policies, that for the first time blames Germany explicitly for its record trade surpluses, I published an op-ed on the Italian daily Il Sole 24 Ore (in Italian), comparing Germany with China. My argument there is the following:
- Before the crisis the excess savings of China and Germany, the two largest world exporters, contributed to the growing global imbalances by absorbing the excess demand of the U.S. and of other economies (e.g., the Eurozone periphery) that made the world economy fragile. (more here)
- In the past decade, China seems to have grasped the problems yielded by an export-led growth model, and tried to rebalance away from exports (and lately investment) towards consumption (more here). The adjustment is slow, sometimes incoherent, but it is happening.
- Germany walked a different path, proudly claiming that the compression of domestic demand and increased exports were the correct way out of the crisis (as well as the correct model for long-term growth)
- Germany’s economic size, its position of creditor, and its relatively better performance following the sovereign debt crisis, (together with a certain ideological complicity from EC institutions) allowed Germany to impose the model based on austerity and deflation to peripheral eurozone countries in crisis.
- Even abstracting from the harmful effects of austerity (more here), I then pointed out that the German model cannot work for two reasons: The first is the many times recalledfallacy of composition): Not everybody can export at the same time. The second, more political, is that by betting on an export-led growth model Germany and Europe will be forced to rely on somebody else’s growth to ensure their prosperity. It is now U.S. imports; it may be China’s tomorrow, and who know who the day after tomorrow. This is of course a source of economic fragility, but also of irrelevance on the political arena, where influence goes hand in hand with economic power. Choosing the German economic model Europe would condemn itself to a secondary role.
I would add that the generalization of the German model to the whole eurozone is leading to increasing current account surpluses. Therefore, this is not simply a European problem anymore. By running excess savings as a whole, we are collectively refusing to chip in the ongoing fragile recovery. The rest of the world is right to be annoyed at Germany’s surpluses. We continue to behave like Lilliput, refusing to play our role of large economy.
Let me conclude by noticing that today in his blog Krugman shows that sometimes a chart is worth a thousand (actually 748) words:
The worst thing, if you ask me, in the Spiegel report on the controversy is the statement by Germany’s Economics Ministry that Germany’s surplus is
a sign of the competitiveness of the German economy and global demand for quality products from Germany.
Economists everywhere should read this and weep. It is a basic accounting identity that
Current account = Savings – Investment
Any story about the determination of the current account balance must take this identity into account. Suppose you have wonderful products that the world loves; even so, if you have low savings and high investment, you must run deficits. How can this happen? Simple: you end up with a high value of your currency and/or high wages relative to competitors.
So while it’s impressive that Germany can run a surplus despite quite high labor costs, and that’s a testimony to the quality of its stuff, ultimately the surplus reflects high savings relative to investment.
And we are, as I said in a different context just the other day, in a world awash in savings, a world in which someone who decides to spend less and save more makes the whole world poorer. That’s not the normal situation, but it’s where we are now, and where we have been for five years.
Does the German Economics Ministry really not understand any of this? My guess is that it doesn’t — that Germany really does see itself as a role model, believes that all would be well if everyone behaved the same, and doesn’t see the notion of a world in which everyone runs big trade surpluses as being problematic in the least.
As I mentioned at the beginning, the reports and blog posts about German economic policy are accumulating. These are not particularly new ideas and are definitely not personal attacks from Paul Krugman against the nation of Germany.
It seems like the German position here is not far from the American misunderstanding of our macroeconomic situation:
Berlin’s attention to its own domestic priorities seems likely to stir resentment that the medicine of austerity prescribed by Berlin abroad is administered with less zeal at home. Analysts say the contrast is angering voters throughout Europe, where populist and anti-European Union parties are steadily gaining strength outside Germany.
No, no, no! This is the euro equivalent of “American families are having to tighten its belts, so the government should tighten its belt too.” We want Germany to spend more, so that it provides a market for other countries and stops adding so much to the world’s excess savings. The last thing European debtors, or anyone else for that matter, should demand is that Germany put on a hair shirt.
So please, Germany, live it up.
It would be better economically (lowering unemployment and slightly raising inflation) for Germany to spend more. Not unlike the U.S., they have a unique and important opportunity to spend money and invest in the future. Think about all the good they could do!