Germany will not drive a European recovery
The European Union’s biggest member goes to the polls in less than four weeks. Yet while Germany’s economic prospects rest precariously on a recovery in foreign demand, the campaign has been free of any real debate about the country’s extraordinary export dependence. This is worrying.
A sustainable EU economic recovery requires a rebalancing between its surplus and deficit countries. Germany will need to grow under its own steam while others reduce their reliance on domestic demand and boost exports. Trade imbalances have narrowed during the downturn, but addressing the underlying disequilibriums will require changes in member states’ economic structures. If this does not happen, long-term growth in Europe will be weak and tensions within the eurozone inevitable.
The German economy returned to growth in the second quarter of the year, ahead of most of Europe. Many people inside and outside the country were quick to argue that this vindicated the German preference for export-led growth. According to this analysis, a recovery in Germany would propel the rest of the eurozone. Counter-intuitive as it may sound, however, the return of the German economy to growth may be a mixed blessing for Europe. Mounting confidence in Germany that it is on the cusp of a return to rapid export-led growth is likely to reduce pressure on the country’s authorities to focus more on domestic demand.
Berlin has taken steps to defend consumption by helping to finance the wages of private-sector workers (and hence stemming the rise in unemployment) and by subsidising the sales of new cars. Largely as a result, consumption has held up pretty well. But these are just stop-gap measures to tide the economy over until foreign demand recovers. Far from representing an acceptance that Germany needs to change, the general consensus remains that the answer lies in other European countries becoming more like Germany. They should consume less, save more and by implication run a current account surplus.
If Europe was able to run a huge and steadily rising current account surplus with the rest of the world, then it might be mathematically possible for the whole of the EU to pursue a German course. But this is not going to happen. The US deficit is narrowing as American households begin the process of strengthening their finances, while there is no chance of Asia assuming the role of “consumer of last resort”.
There is a tendency in Germany to portray criticism of German policy as “anti-German” or as a product of envy. But it is no more anti-German than German criticism of the poor management of the US and British economies is anti-American or anti-British. As for envy, Germany’s growth performance has been one of the weakest in Europe for years. Stripping out the contribution from exports, it has been the worst. Even in an economy as export-focused as Germany’s, it is the performance of the domestic economy that really matters in terms of jobs and living standards.
A reinforced German belief in the superiority of export-led growth would be a recipe for weak growth in Germany and serious problems elsewhere in Europe. Germany would no doubt succeed in further boosting its market share within the eurozone. After all, the country’s companies have shown themselves more adept at cutting costs than their competitors in other eurozone economies. But this will come at the cost of stagnant domestic demand in Germany.
Against this backdrop, it will be very hard for the eurozone’s deficit countries to rebalance their economies. They cannot devalue and can only boost productivity in the long term. They will therefore have no choice but to ensure that their wages and prices fall relative to those of Germany. Even if it is possible to pull this off, the impact on the eurozone economy will be dire. Domestic demand (and hence economic growth) will be very weak, raising the prospect of fiscal crises in a number of member states.
Rather than waiting for others to recover their appetite for Germany’s goods, the country’s political parties should be concentrating on finding lasting solutions to the weakness of domestic demand. Allowing to it to stagnate is akin to pursuing a beggar-thy-neighbour policy that will undermine Germany’s and Europe’s economic prospects.