By Marshall Auerback, a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator; first posted at New Deal 2.0.
Before throwing rocks at the U.S. for its spending, Germany should take a look at its own crumbling glass house.
Okay, I did a few years of German language study, so I know that the real word for hypocrite is “Heuchler”. But when I read the latest guff from Germany’s Finance Minister criticizing America’s economic policies, I’m afraid that Wolfgang Schauble’s name immediately sprung to mind for a substitute. In an unusually undiplomatic manner, German Finance Minister Schauble criticized the U.S. Federal Reserve’s recent decision to undertake another round of quantitative easing, arguing that it wouldn’t help the U.S. economy or its global partners.
He could well be right. We’ve argued much the same against “QE2″. Where we draw the line is Schauble’s subsequent comments from the same article:
Germany’s exporting success is based on the increased competitiveness of our companies, not on some sort of currency sleight-of-hand. The American growth model, by comparison, is stuck in a deep crisis… The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base. There are many reasons for America’s problems-German export surpluses aren’t one of them.
No crisis in Europe? The threat to the euro, the establishment of a bailout facility, the involvement of the IMF, these were all figments of the market’s collective imagination? Even Goethe is unworthy of such flights of imagination!
One thing is clear from the remarks that continue to emanate from Germany’s policy makers, including the latest from Schauble. They do not understand basic accounting identities. They fail to see any kind of relationship between their own export model and their trading partners.
It is ironic (and more than a touch hypocritical) that Germany chastises its neighbors, like Greece, or its trading partners like the U.S., for their “profligacy”, but relies on these countries “living beyond their means” to produce a trade surplus that allows its own government to run smaller budget deficits.
It’s even more extreme within the euro zone proper. The European Monetary Union bloc as a whole runs an approximately balanced current account with the rest of the world. Hence, within Euroland it is a zero-sum game: one nation’s current account surplus is offset by a deficit run by a neighbor. And given triple constraints — an inability to devalue the euro, a global downturn, and the most dominant partner within the bloc, Germany, committed to running its own trade surpluses — it seems quite unlikely that poor, suffering nations like Greece or Ireland could move toward a current account surplus and thereby help to reduce its own government “profligacy”. It is hardly worth pointing out that these stringent conditions were largely the creation of former German Finance Minister, Theo Waigel, or that Germany itself was a serial violator of the so-called “Stability and Growth Pact” throughout much of the 1990s and early 2000s.
That history aside, the dirty little secret of the European Monetary Union is that it locked Germany’s main export competitors into the monetary union at hopelessly uncompetitive exchange rates, thereby entrenching Germany’s export dominance, and its selfish, mercantilist model.
Germany’s policy-making elites are unprepared to acknowledge any of this. Symptomatic of the current government’s blindness is its agreement to extend the temporary bailout arrangements with the euro zone and make them permanent as a quid pro quo for the EMU nations achieving “fiscal discipline … to bring deficit and debt onto a more sustainable path.”
It is more than stating the obvious to note that the only reason the euro has not blown apart in the past few months is because the European Central Bank, contrary to the wishes of Germany’s policy-making elites, has continued to backstop the PIIGS‘ debt, thereby preventing an even broader economic/financial calamity within the European Monetary Union. How else does a fundamentally insolvent nation like Ireland survive with a budget deficit to GDP ratio of 32%?It could abandon the current system or put the capacity in place to deal with asymmetric demand shocks (that is, a unified fiscal authority) the European Council. But at the behest of Mr Schauble’s German government, it has instead just introduced measures which will make the situation worse both in the short-run and in the medium-term, when the next negative demand shock arrives.
The entire European Monetary Union structure is a mess. The euro zone members are all trapped within this monetary monstrosity, Germany included. Germany might occupy the penthouse suite, but it’s the penthouse suite of a roach motel. The EMU was conceived under profoundly anti-democratic circumstances (the German voters never had a chance to vote by referendum on whether to abandon the Deutschemark in favor of the euro), so it isn’t fair to extend the charge of hypocrisy to the nation as a whole. But the German people have been significantly ill-served by elitist technocrats such as Wolfgang Schauble. As one of the architects of European Monetary Union during his time under the Kohl Administration, he at least bears some responsibility for this abominable fiscal/monetary halfway house, which serves nobody’s interests, Germany included. Herr Schauble would be on much stronger grounds to critique U.S. policy making if he had the guts to acknowledge this and try to sort out what he helped to create before hypocritically lecturing Americans on their profligate ways. Our “sins” enable them to sustain their export juggernaut.