AICGS: ANALYSES : The U.S.-German Economic Relationship: A Solid Anchor for Transatlantic Relations

The hand wringing over the state of transatlantic relations inaugurated by the Bush presidency focuses mostly on political relations. Fissure began appearing with the president's first European trip, when he traveled to Spain and Poland rather than to Germany, as President Clinton had. These tensions soon escalated and led some commentators to call into question the relationship between Germany and the United States.

Beneath the Sturm und Drang of foreign policy, however, is a solid base of economic relations between Germany and the United States that seems to be thriving despite the low-growth environment and political uncertainty. Germany remains a very important location for U.S. assets abroad, and U.S. firms added another seven billion dollars to that total in 2003. The same is true for German firms investing in the United States, which employed over 700,000 Americans, the second most important job creation effort by a foreign investor in the United States. Exports and imports from both countries are significant and will likely rise as growth picks up in the United States and Germany. This economic interdependence is important to remember in any discussion about transatlantic relations.

At present, most of the economic differences between Germany and the United States do not rise to the level of high politics, partly because other topics in foreign policy are more pressing, and partly because many of the United States' economic complaints are with EU-level regulations or rules-issues that are not discussed bilaterally. That does not mean, however, that there are no issues on which they differ. Most of the bilateral issues are interpretations of macroeconomic phenomena about which the two partners disagree. From the U.S. point of view, the German labor market remains overly regulated and cannot become efficient enough to drive renewed growth. Agenda 2010 is insufficient to get the problem solved. Moreover, German consumer spending is too low and variable, therefore unreliable as an engine of growth. Some on the U.S. side also fear a widespread banking failure in Germany, but German regulators reject the notion of a systemic banking problem.

On the German side, policymakers view the American twin deficits as significant dangers to the world economy, and the negative household savings rate as a long-term risk factor that the U.S. government would do well to try to change. But in many respects, Germany and the United States face very similar challenges: both economies bear significant risks from an oil shock, an aging population (the United States has greater flexibility here because of higher rates of immigration) and fairly high fiscal deficits. In both economies, politicians have made an issue of outsourcing jobs abroad (U.S. jobs to China, German jobs to the new central and eastern EU member states).

As important as the bilateral German-U.S. economic relationship is, it is always influenced by the larger and more important EU-U.S. relationship, and should rightly be seen in this larger context. Paradoxically, the role of Germany (as well as France, for that matter) in the EU will likely increase as a result of the 2004 enlargement. Germany, as the largest economy in the twenty-five-member EU, has a status of first amongst equals, and it is possible that the United States will begin to harness that status. While informal consensus decision-making on economic measures was typical of an EU of twelve or fifteen members, the 2004 enlargement has created a dynamic where more adversarial, by-the-treaty relations are becoming more accepted. As the formal decision-making process becomes institutionalized in the EU (a process which outweighs the views of the small countries) Germany and France have indicated that they will engage in "enhanced cooperation" (having a subset of countries-currently eight-go forward with integration that does not bind the others) when they cannot prevail in a twenty-five member EU. For example, although the UK and Ireland vigorously oppose a harmonized corporate tax, Germany and France have indicated they may use enhanced cooperation to establish a zone within the EU in which corporations would pay the same rate.

When some of the new member states join the euro, the larger states, including Germany, will be rotated into the Governing Council voting chairs more often, implying a monetary policy that may be more geared toward the economic needs of the slower growing, lower inflation member states. It is possible that Germany's economy would benefit disproportionately from a looser monetary policy, helping to remedy some of the fiscal problems that are of concern to Germany's EU and U.S. partners.

With the economic bonds between the United States and Germany providing such a strong foundation for the bilateral relationship, the focus on fundamental differences between the countries seems somewhat strange. On the basis of the economic ties, one would expect a strengthening of transatlantic ties, as Germany becomes an informal ancillary conduit to the EU, where 80 percent of the European states' economic laws and regulations are made. The kinds of issues that divide the United States from Germany are relatively minor in the spectrum of economics gripes, and the existence of supranational organizations like the WTO, as well as various transnational groupings of non-governmental actors like the Transatlantic Business Dialogue, has thus far prevented any unilateral actions from wreaking havoc on the bilateral or international economic system. In these times of strained political ties between Germany and the United States, it is welcome news that at the end of the day, all of the politicians involved have a significant economic stake in remaining friends.

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Professor Dorothee Heisenberg is Assistant Professor of European Studies at the School of Advanced International Studies, the Johns Hopkins University, and member of the 2003 AICGS Study Group on Reinventing the German Economy as well as the AICGS Senior Advisory Council.

This essay appeared in the July 1, 2004 AICGS Advisor.
The views expressed in this article are those of the author(s) alone.
They do not necessarily reflect the views of the American Institute for Contemporary German Studies.

AICGS is grateful to the German Marshall Fund of the United States for its generous support of this essay series.