Germany Is Fighting With Europe - Can China Be Far Behind?

Earlier this week Ambrose Evans-Pritchard had an article in the UK paper The Telegraph which starts off with “For the first time in my life, I am starting to feel twinges of anti-German sentiment.” The article goes on to lambaste the German government, and especially German finance minister Peer Steinbrück, for what Paul Krugman earlier called “boneheadedness” in refusing to participate in the European fiscal expansion and, worse, for calling British and French programs “crass Keynesianism.” According to Krugman:

The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There’s a huge multiplier effect at work; it is multiplying the impact of German boneheadedness.

Evans-Pritchard explains why a number of European countries, led by France and England, are so angry:

Put bluntly, Germany is pursuing a beggar-thy-neighbor policy. It is not fulfilling its responsibilities as the world’s top exporter and pivotal power of Europe’s monetary union. It is leaching off global demand, even as it patronizes Anglo-Saxons, Latins, and Slavs. No doubt binge debtors in the Anglosphere are much to blame for this crisis. But Germany rode the boom too. It made those Porsches and BMWs driven by the new rich. Its banks are among the most leveraged in the world.

Nor should we not forget that the European Central Bank set interest rates at recklessly low levels early this decade to help Germany out of a slump. Can this be separated from the property bubbles in Club Med, Holland, Ireland, Scandinavia, and Eastern Europe now causing such grief? Within the EMU, Germany has gained a competitive edge against France, Italy, and Spain for year after year by screwing down wages. In pre-euro days the North-South rift did not matter. The D-Mark revalued. Balance was restored. In monetary union it is toxic.

The point he is making is that the imbalances were not created simply by “binge debtors in the Anglosphere” but also by those countries that subsidized directly or indirectly overproduction, which ultimately have had much to do with the very conditions that led to consumption binge. This includes not just Germany but any of the countries that created persistent and high trade surpluses. Evans Pritchard makes the comparison very explicit:

Germany now has a current account surplus of 7pc of GDP. It is hollowing the industrial core of Latin Europe. Yes, Club Med needs to pull its socks up, but the flip side of the coin is that Germany is in breach of EMU’s implicit contract. The rules of the game are that surplus countries should boost demand. The Gold Standard collapsed in the early 1930s because they – then the US and France – refused to do so. The burden of adjustment fell on deficit states, who had to tighten yet harder.

The downward spiral dragged everybody into depression. Germany and China are today’s violators. Their trade surpluses over the last 12 months have been $283bn and $279bn, respectively. They are exporting excess capacity.

What does all this have to do with China? The reasons I bring this up is because it is, I think, a foretaste of the type of nasty battles that are likely to erupt between the trade-surplus and trade-deficit countries as global demand continues to contract. The overconsuming trade-deficit countries cannot reduce their overconsumption except with a collapse in production (and sharply rising unemployment) if the overproducing countries do not also adjust. Furthermore, fiscal expansion aimed at generating employment in countries with large trade deficits will not be nearly as effective as they might be if they are not matched with programs in trade surplus countries (essentially demand boosting fiscal programs) that prevent domestic demand from bleeding out the trade account.

The French and the British (and much of the rest of Europe) are concerned that if their governments borrow to boost domestic demand and employment at home, they are also borrowing to boost demand and employment in Germany, which means that they bear the fiscal cost for the foreseeable future while Germany gets a substantial chunk of the benefit. This may be a great deal for Germany, but it is one hard for the rest of Europe to embrace.

In Europe it is clear to me that the economic debate is migrating rapidly towards consideration of the impact of trade, and it would be surprising if the debate does not quickly globalize. If Europeans, nominally members of one country (sort of), can get into such an acrimonious debate among themselves, what hope is there for a polite and statesmanlike discussion that involves countries less tied together? I believe that in the US there is a much stronger commitment to free trade and, in spite of Mr. Bush, multilateral cooperation on economic issues, then elsewhere, but politics is politics, and rising unemployment in the US will inevitably lead to the same confrontational attitudes as they seem to have in Europe.

Comments

[M.R. Henderson:]

It is rarely acknowledged in the press, or clearly elucidated, why the RMB should appreciate hand-in-hand with Chinese efficiency in so many export markets. In a simplified manner of speaking, as a country begins to be valued more by trading partners, the currency becomes more valuable, appreciating, making their goods more expensive. This creates sustainable development. China (and also Japan and others) have tried to pump the system for all it is worth by keeping their currencies weak, and while pointing a finger at a single nation does not work, hopefully the economic minds in the next US administration will point toward a basket of nations that must play their part in the global economy or risk undermining free trade. As far as free trade goes, if we are to rule out tariffs to respond to this type of "dumping", then what other options are open to us? WTO?

2008 Dec 17 12:22 PM

[Philly Jim:]

The great clash of ideals begins. 1.) China will not obey capitalist dreams of a billion consumers with an inflated currency 2.) Germany has a history of being "boneheaded", I call it a superiority complex. 3.) Both realise they need the Anglos & others to keep consuming their products before they go broke as well; however, they always think of themselves first, it's only natural. The final problem of concern is the increasing dissent in the present world financial order: OPEC nations know the West wants off oil - they are protecting themselves; the East knows the West wants to get back into the manufacturing game - they are protecting themselves, and all the rest just want speculators to return to pumping up their tiny markets via commodities or property.

Good luck to Obama, he has a major task before him and I'm sure he can handle it all!

2008 Dec 17 02:01 PM

[scearybeary:]

The debate over Germany's trade surplus has been going on in Europe for quite a while. Indeed was Germany consistently gaining market shares from neighboring countries trough a wage-war and underconsumption. However the situation is a little less dramatic because Germany has to bear an ever greater share of the EU budget. Nevertheless Germany is to be blamed for being a part of the problem and the EU must deal with this. China on the other side may be forced to increase domestic demand because of increasing unemployment. The idling industrial capacities could easily be absorbed by a huge domestic consumer demand and China has already reacted in this way by launching a huge domestic stimulus program.

2008 Dec 17 08:41 PM

[HaavBline:]

It is not very diplomatic for German finance minister Peer Steinbrück to call British and French programs “crass Keynesianism".
But frankly Ambrose Evans-Pritchard’s comments sound nothing more than very self-serving politics from a newspaper editor of a “binge debtors in the Anglosphere” country (UK). This theory about exporting ‘overcapacity’ still does not make any sense to me. If there were no over-demand from “binge-debtor/over-con... there would be no justification for capital investment for “over-capacity” in “over-producing” countries. As “binge debtors in the Anglosphere” exhausted their capacities to over-consume, the over-capacity in “over-producing” countries become idled, wasted assets. In other words, the over-producing countries face just as much challenges as over-consuming countries.

In the interest of world harmony and prosperity, the argument that financially stronger countries (such as Germany, China) should shoulder more responsibility in stimulating consumption to help bail-out those “binge debtors” countries is understandable. But imposing an economic theory that does not make sense in order to justify pointless Anglo-finger-pointing is not going to help matters.

2008 Dec 18 08:25 PM