U.S. to Germany: Try Being Helpful for a Change

(Originally published here.)

The U.S. Treasury has singled out Germany as a menace to its fellow Europeans:

Countries with large and persistent surplus need to take action to boost domestic demand growth and shrink their surpluses. 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 countries 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.

This critique is correct. Germany’s obsession with running ever-larger current account surpluses has exacerbated the problems of the troubled countries. Even the European Commission is now saying that the single currency bloc would be better off if Germany (and other chronic offenders such as the Netherlands) boosted domestic consumption with infrastructure spending.

But German officials have said that they find the American position “incomprehensible.” According to a spokesman from Germany’s Economics Ministry, “the trade surpluses reflect the strong competitiveness of the German economy and the international demand for quality products from Germany.”

That’s just wrong. Trade balances simply reflect the balance between domestic production and consumption. The special appeal of German products — if there even is one — should show up in the volume of its exports, not the difference between its exports and its imports. Just ask France and Italy, which are home to many of the world’s best luxury brands yet rancurrent account deficits for years.

Besides, many of the countries with the largest current account surpluses are oil-producers. Is Germany really saying that the economies of Saudi Arabia, Kuwait and Russia are as “competitive” as the dour northern Europeans? Which of their policies is the Portuguese government supposed to copy?

Today, Germany went a step further, claiming that “there are no imbalances in Germany” — a response that perfectly demonstrates a failure (or unwillingness) to understand basic accounting identities. (German officials have also claimed that the International Monetary Fund has endorsed their economic policies, although that isn’t quite true.)

Imbalances can’t exist in isolation. Every reckless borrower has to be enabled by a reckless lender somewhere else. Current account surpluses in one country can’t exist without current account deficits in another. Similarly, government budget surpluses can’t exist unless everyone else in the economy borrows more than they save. It makes no sense for German officials to claim that there are no imbalances while also arguing that other countries need to do more to rectify their own lack of competitiveness.

The euro is the real secret behind Germany’s success. Germany didn’t start running large current account surpluses until after it joined the single currency. Spain’s trade deficit had been stable and modest for decades before it quintupled in size between 1999, when the single currency was established, and 2008. German policy makers have been pretending otherwise for years, to the severe detriment of their fellow Europeans. Maybe the IMF’s and European Commission’s recent criticisms will get them to realize it.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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