by Stuart Burns
Some American business folk look at Germany's industrial policy with a little envy. Germany, it seems, is willing to do just about anything to support its manufacturing industries and the benefits are plain to see. With a vibrant manufacturing sector exporting around the world, it doesn't get any better than brand Germany when it comes to machine tools, manufacturing equipment, automotive technology, and much else.
At the same time, Germany is often looked upon as one of the good guys-- respecting intellectual property and international law, while leading Europe out of its mess of debt and incontinent tax collection with fiscal responsibility. But not all would agree.
Paul Krugman, the influential Professor of Economics and International Affairs at Princeton University, is well known for his liberal views on trade and international economics. His view of Germany is somewhat different from the above, as he recent opined in a NY Times article.
In Krugman's view, Germany has taken the place of China as the current account running bogeyman of the world economy. For one, Germany has overtaken China as the running the world's largest current account surplus; both in absolute terms and in terms of a share of GDP, it is twice China's. That alone Krugman views as bad enough. One country's surplus is another's deficit, he says, and he notes that Germany has been running a surplus for a decade, but earlier these were offset by equally massive deficits in many European countries.
Europe as a whole ran a small surplus with the rest of the world. Germany remains dependent on its neighbors, with 69% of total exports going to European countries, including 57% to the member states of the European Union. Of course, not all neighbors are equal. In 2012, Germany ran a trade deficit of €27 billion ($36 billion) with Russia, Libya, and Norway, mainly for energy imports. Germany also had trade deficits with Japan of €4.7 billion ($6.3 billion) and China €11.7 billion ($15.8 billion). But crucially, Germany had a trade surplus with the eurozone (France, Italy, Spain, Greece, Portugal, Cyprus, and Ireland) of €54.6 billion ($73.7 billion).
Austerity (largely at Germany's insistence) has meant these countries no longer run large deficits. Their deficits have shrunk, but Germany's surplus hasn't. In Krugman's view, Germany's failure to adjust magnified the cost of austerity.
Take for example Spain, the biggest deficit country before the crisis. Krugman says it was inevitable that Spain would face lean years as it learned to live within its means. It was not, however, inevitable that Spanish unemployment would be almost 27%, and youth unemployment almost 57%. Krugman sees Germany's surplus as a bad thing, not just for Europe but for the world, helping to keep the world economy depressed. Germany's growth comes at the price of another's consumption, not of their own goods but Germany's, depriving them of domestic investment and employment.
It's certainly a valid point that Germany has benefited from the EU and - as paymasters and the largest economy - from how they run it. If Germany had retained the Deutsche mark, they would have the strongest major currency in the world right now. And like the Swiss Franc and Australian Dollar, that would have a counterbalancing effect on the country's exports and ability to compete.
Be that as it may, the fact remains that Germany is part of the EU and remains the core of the Euro. Weak as that currency is relative to other currencies, it is still much stronger because of Germany than it would be without. What Krugman would have the Germans do is not clear - boost internal consumption surely, allow some higher inflation. The economy has almost flirted with deflation as the rate has been so low at times in recent years. But a country's government is there to look after the best interests of its people and arguably, that is exactly what Germany is doing.
Would the U.S., Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don't think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy already has the lowest unemployment rate in Europe.
The villain here is not Germany, but the Euro. Arguably, if Germany left the Euro, one could see some immediate corrective swings occurring. Germany's new currency would rise dramatically against the "new" Euro, and the remaining Euro countries would benefit from a massive devaluation in their currency, boosting competitiveness.
Unfortunately, there would be no one to fund the hundreds of billions of dodgy loans and outright debt the area is saddled with. Because what is oft overlooked is the fact that Germany has been the largest contributor to the European Stability Fund and the European Central Bank. German guarantees supporting the existing bailout fund amount to €211 billion ($285 billion). The ESM will require a capital contribution from Germany. If the ESM lends its full commitment of €500 billion ($675 billion) and the recipients default, Germany's liability could be as high as €280 billion ($378 billion).
As the FT points out, the size of these exposures is huge in relation to Germany's GDP of around €2.5 trillion, and German household assets estimated at €4.7 trillion. Nor is Germany without its own problems. It has substantial levels of its own debt (over 80% of GDP), an aging population, and deteriorating dependency ratios, to compound its problems. No wonder Germany suggested taking over the running of the Greek economy early in 2012. They wanted to be sure a major default didn't start a domino effect that would end at Germany's doorstep.
The other issue that needs some rebalancing is the statistics on unemployment. Yes, it is high in Spain, but it's not as high as it appears. Since the financial crisis, the black economy has been on the rise. I recently spoke with a Spanish industrialist, who explained that many workers are registered for unemployment but also working part-time or even full-time for a lower wage. It's a way of making ends meet, but it overstates the true level of unemployment quite considerably.
The employment tragedy is more acute among the young coming out of education who can't get full-time careers off the ground, with a return to growth taking so long, there may be a generation of well-educated young people who lack sufficient experience to ever gain the career for which they trained.
So we take issue with Mr Krugman on this. We don't dispute that Germany has done well out of the Euro. But it has also done well in its role as anchorman of the eurozone. A little more inflation and less repression on internal consumption would help fuel growth across Europe, but it's not clear that German consumers buying more would transform the export prospects of the club med economies.
The real villain of the peace is the Euro, that politically inspired, one-size-fits-all, strait jacket of a currency. It contains highly disparate economies within its folds, ones that really don't need to be operating under the same fiscal rules as their neighbors. But don't expect Europe's politicians (or the U.S. treasury, which is also complaining loudly) to call for a dismantling of the Euro. It's far easier to take a pop at Germany's export surpluses, surpluses they would love to face in their own economies.