Germany Can Complain, but the U.S. Is Right on Its Economic Policy

Washington’s criticism that Germany has only worsened Europe’s economic problems makes a lot of sense

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Krisztian Bocsi / Bloomberg / Getty Images

Shipping container cranes and containers are seen in the Port of Hamburg, Germany, in June 2013.

Could relations between longtime allies Germany and the U.S. get any frostier? First, Berlin was angered by revelations that Washington was listening in on German Chancellor Angela Merkel’s phone conversations. Then Washington added fuel to the fire by attacking German economic policy.

In a report released Oct. 30, the U.S. Treasury Department criticized Berlin for following policies that it claimed contributed to the severe economic woes confronting the euro zone. An obviously annoyed Berlin was quick to fire back, defending its policies and calling the Treasury’s critique “incomprehensible.”

Clearly, the timing of the Treasury’s report could not have been worse. And to be fair to Germany, Berlin has been instrumental in backing the bailouts that helped stabilize the euro zone’s debt crisis.

“The Germans are also often given far too little credit for what they have already done to keep the euro zone together,” Gideon Rachman wrote in a Financial Times blog post. Even more, the U.S. has little right to be criticizing anyone else these days, since its own policies have not shown the utmost responsibility. The political shenanigans over raising the debt ceiling, for instance, threatened the entire global economy.

Still, on purely economic grounds, the U.S. makes a sound point. German growth depends on exports and it notches up a large current account surplus — of nearly 7% of its GDP in 2012, according to IMF data, significantly higher than China’s often criticized surplus. That pushes its weaker neighbors into deficit, putting pressure on their already depressed economies.

(VIDEO: Why Germany Must Save the Euro to Save Itself)

As the Treasury report put it, “Germany’s anemic 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.” In other words? “The net result has been a deflationary bias for the euro area, as well as for the world economy.”

Germany sees things differently. In Berlin’s response to the Treasury report, it said that its surplus is “a sign of the competitiveness of the German economy and global demand for quality products from Germany.” That is true. Germany runs a surplus because its export industries are more efficient and competitive than others in Europe. But U.S. officials and many economists have been arguing for years that Europe would be better off if Germany reduced its surplus by stimulating consumption at home. By doing so, Germans would (at least in theory) buy more from the rest of the euro zone, narrowing the German surplus, stimulating growth in its neighbors and helping to alleviate some of the pain of the debt crisis.

Berlin, though, has consistently refused to support pro-growth policies for Europe — instead favoring heavy austerity to force reform in Spain, Greece and the zone’s other crisis-hit economies. There is little doubt that such a stand contributed to the worst-ever recession in the euro zone and to ridiculously high unemployment.

So German policymakers can protest all they want. On this one, the U.S. is right.

MORE: In Crisis, Angela Merkel Fights to Lead Germany

6 comments
MonikaNilles
MonikaNilles

Why is it that America still like to dip its fingers in other country's business, like Germany for instance. To criticizing how and what about Germany's economics, I believe that America have ENOUGH on its own plate. Germany is helping people within the EU as well taking refugees although the country is busting out of all seems. Is America pay Kindergeld for every child??? Or welcome refugees with open arms?? That all cost money, yet Germany always somehow managed and don't deserve such criticism from the USA!

schlawa
schlawa

"Still, on purely economic grounds, the U.S. makes a sound point. German growth depends on exports and it notches up a large current account surplus — of nearly 7% of its GDP in 2012, according to IMF data, significantly higher than China’s often-criticized surplus. That pushes its weaker neighbors into deficit, putting pressure on their already depressed economies."

 Again the United States demonstrate their total ignorance of all European affairs.  Germany's trade surplus within the European Union is just 2%,  the Netherlands and Scandinavia have a positive net balance with Germany.   

benyaminshaker
benyaminshaker

so germany is too strong?, So let them be weaker to help the franch compete? No, let the french give up their lethargic ways and work, then will they compete. ut not germany. Germany shall and will remain strong, regardless of US rhetoric

KB100
KB100

Eh, the Germans are fundamentally far more fiscally conservative (I know it's a sweeping generalization) than us Americans, and certainly don't buy things just because they can. Germans are a nation and culture of efficiency and collaboration, not influenced as much by individual material market greed. 

In many ways the US used to operate like that, but then every competitive capitalist had to out-compete at the cost of the community and tainted the present-day American experience. We will push back in that direction, but in the meantime, there are going to winners and losers, and Germany is winning. The rest of Europe is losing.


Padmore
Padmore

Unless the USA goes bankrupt of course.

arvay
arvay

@KB100 

Yes, I remember years ago visiting a friend from work in Germany -- he laughed when I told him put my car rental on MasterCard. "Such and American" he said.

I think the Germans and british are wrong about austerity, but the answer isn't just handing money over to Italy, Spain and Greece. Europe needs to operate as a single economic zone, which means some sovereignty needs to be handed over, so that a Continental planning process can locate industries in the south and west and plan effectively as a region.

Isn't going to happen any time soon, so I expect the current mess will continue.