Don’t put Germany on the economic axis of evil
Published in Business Spectator (Melbourne), 7 November 2013
Last week, just as I was about to board my early morning flight to Auckland, I ran into the US Ambassador to New Zealand. An ex-commercial lawyer, he is a witty and clever man who usually does not mind a joke.
Not so that morning. When I teased him about how much more pleasant it must be to be the US envoy to Wellington than to Berlin these days, he really did not find that too funny at all. The discovery of the NSA’s spying activities from the premises of the US embassy in Berlin is probably not the kind of stuff diplomats like to talk about. The Ambassador’s face froze and we quickly started talking about the weather (always a safe choice in Wellington).
A day later, US-German relations sank even lower. This time, for a change, it had nothing to do with phone-tapping, intercepted emails or similar privacy breaches. Instead, it was about a report out of the US Treasury which had allegedly assigned Germany to an economic axis of evil. Well, not quite, but at least that is how it was reported in the German media.
What had happened was the routine publication of the US Treasury’s Report to Congress on International Economic and Exchange Rate Policies. It contained not much new as far as the US government’s outlook on the global economy is concerned. The only change was a shift in language. Whereas previously differences in the assessment of economic policy between the US and Europe were carefully hidden behind diplomatic phrases, the US Treasury now singled out Germany for harsh criticism. Diplomacy has become a rare craft in our time.
The key passage in the US Treasury’s report is this:
“Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anaemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy. Stronger domestic demand growth in surplus European economies, particularly in Germany, would help to facilitate a durable rebalancing of imbalances in the euro area.”
In non-technical language, the US attack can be summed up as follows: Germany’s über-competitive economy is an export steamroller which is too strong to allow other eurozone economies to recover. In doing so, it is also flooding the world with cheap products while at the same time its domestic economy was hardly moving.
What’s wrong with this line of argument? Well, practically everything with one exception: Germany is indeed running a big current account surplus equivalent to almost 7 per cent of economic output. But this does not suggest that Germany is manipulating its currency, nor does it prevent other European economies from reforming.
The core mistake of the US Treasury’s assessment was pointed out by Holger Schmieding, chief economist at Berenberg Bank (and formerly European chief economist at Bank of America). Disaggregating Germany’s trade surplus between eurozone countries and the rest of world, he showed that Germany’s trade surplus with other eurozone economies has fallen from a peak of 5 per cent of GDP in 2007 to just 2 per cent today. At the same time, its surplus with the rest of the world increased from 1 per cent to 3 per cent.
Seen from this angle, it is obvious that Germany is not inhibiting intra-European trade adjustments. These are already underway. Nevertheless, Germany is experiencing significant and growing trade surpluses with the rest of the world. This begs the question whether the Germans could be accused of manipulating their currency, as the US Treasury report implies.
On this question, the answer is not quite as straightforward. From a legalistic point of view, Germany cannot manipulate its own currency. It no longer has one. As part of the eurozone, Germany’s external exchange rate is not entirely of its own making.
Of course, one might argue that if Germany were not part of the eurozone, its currency would likely appreciate and thus lead to a rebalancing of its trade account. Fair enough. On the other hand, the euro’s exchange rate vis-à-vis the US dollar cannot be called undervalued either. If anything, it is the other way around – not least thanks to the US Fed running much more aggressive monetary policy than the European Central Bank.
In any case, what could the Germans really do to please their global critics? Not just the US Treasury, one should add, but also their European neighbours. France has repeatedly moaned about Germany’s export strength and asked for Germany to become, well, less competitive.
And that’s the point. For Germany to become more tolerable to France or the US, it would have to become less successful. Increasing wages, sabotaging productivity or boosting government spending would help to achieve that goal. At the end of such an adjustment process, the German economy would have lost its competitive edge – and other countries would find it easier to keep pace with the Germans.
At least for Europe, such a policy does not make much sense. Sure, one could reduce the economic differential between Germany and, say, France by making Germany more like France. A much better option, however, would be to make France more like Germany. You do not have to be a neoliberal to concede that channelling 57 per cent of the economy through the government is not ideal.
In a similar way, if US companies felt threatened by Germany’s export successes, they should accept the competitive challenge and become better or cheaper. But to complain about Germany’s strength, and then effectively ask it to become worse at what it does, is a silly proposition.
Perhaps the next time the US government wants to criticise some European governments for poor economic policies, they could turn their attention to the least competitive ones instead. And the next time the US Treasury submits a report on international currency manipulation, maybe they could have a closer look at what the US Fed is doing. The cause of the problems may be closer to Washington than to Berlin.