Does German Export Dependence Hurt World Economy?

Dave Johnson

Germany’s economy, like China’s, is geared toward exports. They engineer their economy in ways that bring in money from other countries, and then complain that those countries aren’t cutting back enough. As a result the world economic system is way out of balance. So are they just being smarter than other countries?

This week the US Treasury Department reported that Germany’s export-based economy is pushing the world out of whack. They said Germany needs to back off on the exports and boost internal demand, instead of pushing their products out to the rest of the world as a way to maintain economic dominance, and allow the rest of Europe to start to recover. From the Report to Congress on International Economic and Exchange Rate Policies,

Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy.

“Current account surplus” means they have a continuing trade surplus. The US, in contrast, has a humongous, enormous trade deficit. “Dependence on exports” means they are doing too much selling and not enough buying (like China). “Deflationary bias” means things are likely to get worse in Europe, with  unemployment rising, countries unable to pay down their loans, etc.

AEI’s Desmond Lacham, writing at Seeking Alpha in U.S. Treasury’s Collision Course With Germany, writes about the terrible damage Germany’s policies are doing to the rest of Europe,

Today, Eurostat released data showing that European unemployment remains stuck at an appallingly high rate of 12.2%. It also reported that over the past year overall European consumer price inflation had decelerated sharply from 2.6% to 0.7%. With a number of countries in the European periphery already on the cusp of outright deflation, these trends have to raise questions as to whether overall Europe might not be heading for a bout of Japanese-style deflation.

Germany Responds

Germany says this is just stupid and the obvious imbalances aren’t imbalances at all. The Financial Times explains, in Germany rebuffs US Treasury criticism

“There are no imbalances in Germany that need correction,” a finance ministry spokesman said. “On the contrary, the innovative German economy contributes significantly to global growth through exports and the import of components for finished products.”

Is Germany Just Being Smart?

Germany and China are booming because they focus on exports. They have national policies that help their companies and industries while discouraging imports.

The US complains about the policies of countries like Germany and China but will not do anything about it. The same Treasury report complaining about Germany’s trade imbalance noted that China continues to manipulate its currency, and then refuses to name China a currency manipulator. Labeling China as a manipulator would initiate a process that is written into law to do something about it. But they just won’t. They complain, but they will not take the legally required steps to fix the problem.

The Answer – National Manufacturing Strategy

Germany and China approach trade and manufacturing as countries for the benefit of their country. They have national manufacturing and trade strategies. They do, we don’t. We refuse to because of “ideology.” Our companies are supposed to stand “on their own” without “government help.” This means that we send our companies out into the world to compete with the resources of entire countries — and you can just look around you to see how that is working out. (Note, the organizations that pump out this “ideology” are largely financed by the financial beneficiaries of that ideology. So it it really ideology or is it something else?)

We refuse to do anything about it. And then we complain that other countries are winning, so trade is “out of balance.” Here are two things we could and should do:

1) Senate Democrats introduced a package of 40 bills this week, called the “Manufacturing Jobs for America initiative.” Pass it.

2) The Alliance for American Manufacturing has a plan for a National Manufacturing Strategy to help American companies compete in world markets, bringing home jobs, factories and industries. Please take a look.

Make Population Problem Worse?

Meanwhile a NY Times editorial, Germany’s Blind Spot, says the answer is for Germany to make the world’s population problem even worse,

There is a lot Berlin could do to raise demand at home. For starters, the government can borrow and spend more to help boost investment. It could also cut taxes on lower-income Germans to increase consumer spending. And it could take more aggressive steps to reverse the demographic trends that are expected to shrink the country’s population in coming years. The average German woman has 1.4 children, which is much lower than the replacement rate of 2.1. The government could encourage more births by improving access to child care and providing other benefits and services for parents. It is as much in the interest of Germans to have a more balanced economy as it is for the nation’s partners in Europe and elsewhere.

Really? This is ridiculous on its face.

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