The Germans angrily pronounced this argument incomprehensible. There are no imbalances in Germany which require a correction of our growth-friendly economic and fiscal policy, declared a spokesman for the nations finance ministry.
But Treasury was right, and the German reaction was disturbing. For one thing, it was an indicator of the continuing refusal of policymakers in Germany, in Europe more broadly and for that matter around the world to face up to the nature of our economic problems. For another, it demonstrated Germanys unfortunate tendency to respond to any criticism of its economic policies with cries of victimisation.
First, the facts. Remember the China syndrome, in which Asias largest economy kept running enormous trade surpluses thanks to an undervalued currency Well, China is still running surpluses, but they have declined. Meanwhile, Germany has taken Chinas place: Last year Germany, not China, ran the worlds biggest current account surplus. And measured as a share of GDP, Germanys surplus was more than twice as large as Chinas.
Now, its true that Germany has been running big surpluses for almost a decade. At first, however, these surpluses were matched by large deficits in southern Europe, financed by large inflows of German capital. Europe as a whole continued to have roughly balanced trade.
Then came the crisis, and flows of capital to Europes periphery collapsed. The debtor nations were forcedin part at Germanys insistenceinto harsh austerity, which eliminated their trade deficits. But something went wrong. The narrowing of trade imbalances should have been symmetric, with Germanys surpluses shrinking along with the debtors deficits. Instead, however, Germany failed to make any adjustment at all; deficits in Spain, Greece and elsewhere shrank, but Germanys surplus didnt.
This was a very bad thing for Europe, because Germanys failure to adjust magnified the cost of austerity. Take Spain, the biggest deficit country before the crisis. It was inevitable that Spain would face lean years as it learned to live within its means. It was not, however, inevitable that Spanish unemployment would be almost 27%, and youth unemployment almost 57%. And Germanys immovability was an important contributor to Spains pain.
It has also been a bad thing for the rest of the world. Its simply arithmetic: Since southern Europe has been forced to end its deficits while Germany hasnt reduced its surplus, Europe as a whole is running large trade surpluses, helping to keep the world
German officials, as weve seen, respond to all of this with angry declarations that German policy has been impeccable. Sorry, but this (a) doesnt matter and (b) isnt true.
Why it doesnt matter: Five years after the fall of Lehman, the world economy is still depressed, suffering from a persistent shortage of demand. In this environment, a country that runs a trade surplus is, to use the old phrase, beggaring its neighbours. Its diverting spending away from their goods and services to its own, and thereby taking away jobs. It doesnt matter whether its doing this maliciously or with the best of intentions, its doing it all the same.
Furthermore, as it happens, Germany isnt blameless. It shares a currency with its neighbors, greatly benefiting German exporters, who get to price their goods in a weak euro instead of what would surely have been a soaring Deutsche mark. Yet Germany has failed to deliver on its side of the bargain: To avoid a European depression, it needed to spend more as its neighbours were forced to spend less, and it hasnt done that.
German officials wont, of course, accept any of this. They consider their country a shining role model, to be emulated by all, and the awkward fact that we cant all run gigantic trade surpluses simply doesnt register.
And the thing is, its not just the Germans. Germanys trade surplus is damaging for the same reason cutting food stamps and unemployment benefits in America destroys jobsand Republican politicians are about as receptive as German officials to anyone who tries to point out their error. In the sixth year of a global economic crisis whose essence is that there isnt enough spending, many policy makers still dont get it. And it looks as if they never will.