Costs & Benefits of the German Straitjacket

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deutschland uber alles.jpgDuring the years following the fall of the Berlin Wall, Germany traded the geostrategic insecurity of a Cold War fault line and divided nation for a unified country with high levels of economic tension.  The transfer payments from the West to the East were politically and economically stressful.  The costs of reunification helped compel a rebalancing of accounts, a reduction in Germany’s social welfare framework alongside renewed investment in its manufacturing and export sector.  China’s mercurial growth and juggernaut manufacturing platform has been built in large part on German machine tools and equipment — hitching Germany’s economic fortunes to China’s rising star.

Germany might have chosen not to trim its entitlement outlays to students, retirees, and displaced workers and to instead dig a deeper fiscal hole like many European countries.  For the most party, the German government chose to tilt toward austerity and investment, and the bets it made have largely paid off in the sense that it stands with China, Japan, and various of the Middle East oil states as a leading export-dependent, “surplus nation” while much of the rest of the global economic order wallows (or may be drowning) in debt.

In the Eurozone, however, Germany’s success may ultimately lead to the
unraveling of the economic and political binds that have tied Europe
together.  

Germany, despite moments of leadership in the Euro crisis, has mostly
been a ‘euro late and kilo short’ throughout the crisis.  As former Treasury Secretary Robert Rubin stated at the recent Washington Ideas Forum (sponsored by The Atlantic and Aspen Institute), European economic officials “have not done what needed to be done to get in front of the crisis.”   Martin Wolf, the globally followed chief economics correspondent and Associate Editor of the Financial Times, has said that “Germany has not recognized its hegemonic responsibilities.”  

While the European Central Bank has the authority and resources to
guarantee $5 trillion across the financial institutions of Europe, the
absence of centralized political authority has plagued and aggravated
the financial crisis.  Germany is emerging as the nation that matters
more than all others.  It is establishing itself as the central
authority — and that power is compelling other states into downward
spirals of austerity and collapsed demand.

Now French President Nicolas Sarkozy has said that France must copy Germany
and said “We have to repay our debts and work harder and better.” 
Sarkozy’s conservative economic confidant and adviser Alain Minc, as reported by the Financial Times,
has offered the remarkable comment:  “Finally the French people have
been told what they have not been told for 30 years.  That the criteria
for good economic management are the German criteria.”

Many Germans resent the less efficient, seemingly more slothful, and
economically reckless nations with which they share a currency and feel
that they are being forced into a replay of the transfer payment misery
of the 1990s — this time not for their Eastern German brothers, sisters
and cousins, but for Europeans who speak different languages and are
distinct from German culture and history.

While political and media tributes abound at the moment for German
Chancellor Angela Merkel’s tactical decisiveness in the most recent
Greece private debt write-off deal, few think that this is the end of
the high stakes roller coaster ride.  Italy’s borrowing rates actually
surged to record highs after the Greece deal was announced — not a sign
of confidence that the destructive debt floodwaters had crested.  More
importantly, German prescriptions that its European brethren need to don
a “German straitjacket” and slash debt and consumption is a deeply
flawed course.

France may be able to become more like Germany and diminish the gap
between their mutual economic behaviors — though the political costs
may be high.  But all of Europe cannot do this.   Europe is too large to
grow its economy fundamentally through exports.  China still is
addicted to export led growth.  Though Japan has internal economic
problems, it generates huge current account surpluses as it exports far
more than it consumes.  As nations slash consumption and as key surplus
counties like Germany and China build surpluses and reserves rather than
invest and domestically consume, they are undermining the stability of
the global economic order.  

On top of this export-addicted platform of the surplus nations, the
largest economy in the world, the US — which has not only moved interest
rates and spending up and down to align with American economic conditions
but also to balance global needs — has no chance to kick-start
its growth and employment levels without its own export-led growth
strategy.  The world needs to put American workers back to work — both
for the health of the US and that of the entire global economic system.  Right now, nearly all key states want to grow through
exports — but those who would buy are victims in the crisis or, like
China, have elected to stunt and constrain domestic consumption.

John Maynard Keynes warned of two key fears.  The first the
commoditization of currencies, which has happened.  We live in a world
where a glut of global capital sits next to screaming red balance sheets
throughout the world.  The second fear related to nations pursuing
excessive current account surpluses or maintaining structurally large
deficits as these imbalances would eventually undermine confidence in
the global economic order.  Today, we see surging currency reserves in
many rising states as part of their economic protection strategy.  China
has $3.5 trillion in reserves and pays higher than going market rates
for forward based oil and energy contracts and other strategic
resources.  China’s behavior and those of other reserve accumulators are
manifestations of fear about the future, not trust.  China is behaving
like a hoarder — and given its size and impact in the global economy,
is ushering in the return of mercantilist behaviors among many states.

All countries cannot become Germany and China — and if they were to
follow that track — a Hobbesian world of competitive currency devaluations, trade
wars, further evolution of state-directed capitalism, and mercantilist recklessness could become the norm.

Germany may ultimately demonstrate some larger selflessness during this
economic crisis — but thus far, it has behaved grudgingly and late in
its responses; it has traded economic policy action for the
subordination of other states to German dominance; and it has forced
austerity on states that may be permanently caught in the purgatory of
economic stagnancy.  Germany’s deal-making in the debt crisis is
knee-capping consumption and undermining the middle classes of
neighboring states, thus creating new political pressures that could
burst open the tired seams of the European project.

The global economy needs to be incrementally rebalanced so that those
who overproduce and over-consume each do less of each — but Germany
today is acting more and more like China — demanding applause for
small, reactionary steps of assistance — but not realizing that it has
responsibilities for the larger global good that it is failing to meet.
 
– Steve Clemons is Washington Editor at Large at The Atlantic, where this post first appeared. Clemons can be followed on Twitter at @SCClemons


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