The Germans are outraged, outraged at the United States Treasury Department, whose “Semiannual Report On International Economic and Exchange Rate Policies” says some negative things about how German macroeconomic policy is affecting the world economy. German officials say that the report’s conclusions are “incomprehensible” — which is just bizarre, because they’re absolutely straightforward.
Oh, and yes, the United States inexcusably spied on Angela Merkel — but that has nothing to do with this, and anyone bringing it into this conversation thereby demonstrates his or her intellectual bankruptcy. Also, frank talk about German economic policies doesn’t make you anti-German or anti-European; again, anyone trying to evade the substance of the argument by bringing in that kind of accusation has, in effect, conceded.
So, about the argument. On this page is a brief history of the euro zone, told through one number for two countries, Germany and Spain.
The creation of the euro was followed by the emergence of huge imbalances, with vast amounts of capital flowing from the core countries to the peripheral countries. Then came a “sudden stop” of private capital flows, forcing the peripheral nations to eliminate their current account deficits, albeit with the process slowed by the provision of official loans, mainly through loans among central banks. The really bad news for the periphery is that so far the adjustment has taken place mainly through depressed economies rather than by regained competitiveness, so the counterpart of that “improvement” for Spain is 25 percent unemployment.
Normally you would, and should, expect the adjustment to be more or less symmetrical, with countries with surpluses reducing their surpluses as countries with deficits reduced their deficits. But that hasn’t happened. Germany hasn’t adjusted at all; all of the rise in peripheral European current accounts has taken place at the expense of the rest of the world.
And that’s a very bad thing. We are still in a world ruled by inadequate demand, and very much subject to the paradox of thrift, in which people’s decisions to save more are damaging to the economy as a whole. By running inappropriate large surpluses, Germany is hurting growth and employment in the world at large. Germans may find this incomprehensible, but it’s just macroeconomics 101.
You might argue that it’s not the German government’s fault that it runs surpluses — but you’d be wrong. (I’ve fallen into this trap, but acknowledged the error.) For one thing, Germany has pursued fiscal austerity despite its creditor status, contributing to an overall tightening of policy in the euro zone.
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