ARGUMENT
It’s
Time to Kick Germany Out of the Eurozone
Why
the anchor dragging down the European economy isn’t Athens -- it’s
Berlin.
BY PATRICK
CHOVANECFEBRUARY 20, 2015
Last year, Germany
racked up a record trade surplus of 217 billion euros ($246 billion),
second only to China in global export dominance. To some, this made
Germany a bright spot in an otherwise anemic eurozone economy — a
“growth driver,” as the German finance minister, Wolfgang
Schäuble, puts it. In fact, Germany’s chronic trade surpluses lie
at the heart of Europe’s problems; far from boosting the global
economy, they are dragging it down. The best way to end this perverse
situation is for Germany to leave the eurozone.
Germans usually
respond to such charges with a kind of hurt confusion. We run trade
surpluses, they patiently explain, because we are simply much more
competitive than most of our trading partners. Can you blame us, they
ask, if the world prefers to buy superior German goods (and has
nothing we want in return)? So goes the argument: The rest of the
world just needs to up its game, get its house in order, and become a
bit more like Germany. In the meantime, don’t hate us ‘cuz we’re
beautiful….
Contrary to popular
mythology, however, there’s absolutely no reason why being
“competitive” should mean running a trade surplus. As far back as
1817, the economist David Ricardo pointed out that the optimal basis
for trade is comparative, not absolute, advantage. In other words,
even if a country is better at everything, it should export what it
is best at and import what it is less better at. Having an
across-the-board advantage does not imply that it makes good economic
sense to produce everything yourself, much less to sell more than you
want in return. Or, to put it a bit differently, there’s no
inherent reason why earning more can’t mean spending more, on
consuming both public and private goods, as well as investing in
future productive capacity.
Trade surpluses take
place when a country chooses to spend less than it produces — when
it has excess savings, beyond its domestic need for credit. It lends
that excess savings abroad, financing another country’s ability to
spend more than it produces and, by running a trade deficit, purchase
the lender’s excess production. It’s true that a highly
productive country might have the wherewithal to conjure up excess
savings, while a less productive country might be inclined to borrow
rather than scrape up the savings it needs. But fundamentally, trade
imbalances arise not from competitive advantage but from choices
about how much to save and where that savings should be deployed —
at home or abroad.
Does it ever make
sense to run trade imbalances? Sure it does. In the 19th century,
Britain’s Industrial Revolution enabled it to reap vast earnings
from expanded output, some of which it invested in the United States.
The money lent to a rapidly growing American economy generated higher
returns than it would have back home, while creating a market for
British-made goods. The potential productivity gains made it a
win-win: It made sense for the Americans to borrow and for the
British to lend. But the case also highlights something that’s easy
to forget: Running a trade surplus means financing someone else’s
trade deficit.
The eurozone crisis
is often called a debt crisis. But, in fact, Europe as a whole did
not have an external debt problem, but an internal one: German
surpluses and mounting debt in Europe’s periphery were two sides of
the same coin.German surpluses and mounting debt in Europe’s
periphery were two sides of the same coin. Germans saved (a lot), and
the single currency induced them — rather than save less or invest
it at home — to lend it to their eurozone trading partners, which
used the money to buy German goods. By 2007, Germany’s trade
surplus had reached 195 billion euros, three-fifths of which came
from inside the eurozone. Berlin might call this “thrift,” but
it’s hard to argue that Germany’s excess savings, which its banks
often struggled to put to use, were well invested. Instead, they gave
Germans the illusion of prosperity, trading real work (reflected in
GDP) for paper IOUs that might never be repaid.
Something needed to
change, but what? Normally, each country would pursue its own
monetary policy, relying on exchange rate adjustments to shift the
locus of demand from those that could not afford it to those that
could. Under a single currency, though, this could not happen.
Instead, Europe’s debtors were forced to slash demand, through a
combination of fiscal austerity and debt deleveraging. Their trade
deficits with Germany fell dramatically — but by buying less, not
selling more. All of the so-called PIIGS (Portugal, Ireland, Italy,
Greece, and Spain) saw their total trade with Germany shrink — in
the case of Greece and Ireland, by more than one-third. So, to the
extent Europe rebalanced, it did so at the cost of growth.
The eurozone was
caught in a trap. Its countries needed to move in two separate
directions, but under a single currency, they could only move in lock
step. A Europe that lived within its means meant a Germany that
continued to save more than it spent, rather than driving much-needed
demand. Monetary easing — and a weaker euro — merely redirects
Europe’s internal imbalances outward. Germany’s trade surplus
with the United States exploded (up 49 percent from 2007 to 2013),
and deficits with China and Japan collapsed (by negative 71 percent
and negative 78 percent respectively). Meanwhile, Germany’s trade
balance with Brazil and South Korea flipped from deficit to surplus.
Since 2012,
virtually all of the eurozone’s net GDP growth, on an annual basis,
has come from net exports — further testament to the weakness of
domestic European demand as a driver of growth. It’s doubtful,
however, whether relying on Americans to pile on more debt — and
risk going the way of Greece — is really a reliable strategy. In
principle, narrowing Europe’s trade deficit with China makes more
sense. But in practice, this has consisted less in tapping China’s
mass consumer market than in selling machinery and luxury goods into
China’s credit-fueled investment boom, which itself is predicated
on maintaining an outsized trade surplus with the United States. The
issue isn’t — as it’s so often framed — what’s fair, but
what’s sustainable. And Americans playing the world’s consumer of
last resort, by borrowing to live beyond their means, isn’t
sustainable.
So what should be
done? The best solution — and the least likely to be adopted — is
for Germany to leave the euro and let a reintroduced Deutsche mark
appreciate. Here, the experience of the 1985 Plaza Accord offers some
encouragement. While a stronger yen made barely a dent in Japan’s
structural trade surplus, German behavior proved far more responsive
to the incentives embodied in a stronger mark.
In the past year,
German politicians have proved far more willing to try boosting
demand by raising the minimum wage, cutting the retirement age, and
increasing pensions — moves that may work, but risk harming
productivity, which is ultimately the source of Germany’s capacity
to consume. Perversely, those same politicians refuse to cut taxes or
boost public spending, which in 2014 resulted in Germany posting its
first balanced federal budget since 1969, a year earlier than
planned. To most Germans, any suggestion that they should relax this
fiscal discipline smacks of Greek-style profligacy, but there’s
another way to think about it. The excess savings are already there;
the only question is where to lend it all. Borrowing it domestically
to drive a genuine European recovery might be preferable to (once
again) throwing it at foreigners to buy things they really can’t
afford.
With an aging
population, perhaps it’s understandable why Germans want to save.
But there is no inherent reason to direct that savings abroad when
there is a far more crying need to deploy it at home. The “growth”
Germany generates by funding unsustainable trade imbalances —
inside and outside the eurozone — is an illusion. It is growth that
is borrowed, for only a while. For Germany, and for the world, it’s
a bad trade.
Photo credit: TOBIAS
SCHWARZ/AFP/Getty Images
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