The Germans are outraged, outraged at the U.S. 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 US 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 by
bringing that kind of accusation in has in effect conceded the argument.
So, about the argument. Here’s 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 to the periphery. 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 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 surplus countries reducing
their surpluses as deficit countries 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. 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 eurozone. And one way to think about Germany ’s role
within the euro is that it is in effect engaging in huge foreign exchange
intervention via Target 2, which holds down the “shadow Deutche Mark”:
Of course, I don’t
expect German officials to admit that there’s anything to what Treasury says. They’re
not big on macroeconomics as we understand it; actually, they’re not big on
accounting identities, since their view seems to be that everyone should be
like Germany ,
and run huge trade surpluses.
But Treasury just stated the obvious and
true.
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