German-American Fault Lines

Austerity versus growth is back with a vengeance. German politicians were caught completely off guard by the latest U.S. Treasury report to Congress on International Economic and Exchange Rate Policies. The key findings of the report are not new: “Germany’s anemic pace of domestic demand growth and dependence on exports have hampered re-balancing at a time when many euro area countries have been under severe pressure to curb demand and compress imports in order to promote adjustments. The net result has been a deflationary bias for the euro area, as well as the world economy.” The final sentence is particularly harsh.  The tone of the report surprised the political establishment in Berlin. Germany stands accused of causing economic trouble worldwide, even more so than the usual suspect: China.

German officials have long held the belief that previous U.S. government criticism of Germany’s role in the euro debt crisis was mainly driven by the electoral calendar, i.e., President Barack Obama was trying to get reelected in 2012. The prevailing view was that he needed to blame somebody for the relatively poor performance of the U.S. economy. Once he achieved his political objective, German officials thought, surely things would quiet down.

Widespread questions about the timing of the latest accusations suggest that Germans believe that things are not different this time. Is the U.S. merely trying to strengthen its bargaining position in the ongoing negotiations on a trade and investment partnership between the United States and Europe? Or, is this a form of payback for Germany’s harsh criticism of the U.S. National Security Agency eavesdropping efforts on allies and possibly Chancellor Angela Merkel’s mobile phone? Are Germany and the United States drifting apart?

Obviously nobody knows the exact answer to any of these questions. But, German suspicions imply a level of coordination across U.S. government agencies that I find quite hard to believe. More generally, conspiracy theories only take us so far, especially if they distract from the substance of the issue. Let’s more narrowly focus on what the findings of the report really mean:

  • Germany has a vast current account surplus. More worryingly, it has finally convinced reluctant euro area partners to try to emulate its export driven economic model. If European growth entirely hinges on global growth rather than stronger domestic demand, the risk is that the U.S. once again turns into the consumer of last resort. This process cannot be frictionless and could lead to protectionism.
  • Latest data released by Eurostat confirm that deflation in the euro zone is a real danger. Lost Japanese decades come to mind, with zero inflation, zero growth, and, in the case of Europe at least, the clear and present danger of chronically high levels of unemployment for years to come.
  • The euro zone’s survival may not be in question, but the damage to the real economy and the social fabric is far from overcome. Indeed, things could get worse.

None of these arguments are new. The U.S. put Germany on a negative watch list during the 2009 G20 summit in Pittsburgh by raising the same questions. Not much has changed since then, including the outraged response in Berlin. Indeed, Merkel’s government thinks that most of its actions are going in the right direction, for Germany and Europe:

  • The German economy is adjusting, albeit at a low level. Wages are rising. Domestic consumption is a bit more robust than in past years and finally contributing more strongly to German growth. This will help European partners eventually.
  • If they continue to adjust, Germany insists, Europeans will become more competitive on global markets and start growing again. It’s the old adage of short-term pain that leads to long-term gain.
  • German companies and the government admit that both private and public investments are weak and know that something needs to be done about it. More public investments should be expected in the near future once a new government is formed. It is now likely that Germany will introduce a minimum wage. While it is not clear how much that would contribute to stronger German demand and consumers cannot be forced to spend if they don’t want to, at least some steps are been taken to support consumption.

However, Germany will not suddenly go on a reckless spending spree in order to make it easier for others to adjust. Members of the German government and its central bank, the Bundesbank, constantly remind their international audiences that by weakening Germany artificially, the whole of Europe will suffer eventually. In other words, the adjustments need to be efficient.

In truth, the philosophical divide between Germany and the U.S. is as deep as it was four years ago. What seems to worry the U.S. Treasury is that Germans seem to have won the debate in Europe. If Germany and consequently all of Europe starts thinking and acting like a small open economy and if the U.S. continues to be trapped in the thinking of a big closed one, then a clash could indeed become inevitable. Before they adjust their respective economies, perhaps both sides should explore whether there is a third way that could help them get out of the trap they put themselves in. Certainly, the constant squabbling will not help either side.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.

Alexander Privitera

Alexander Privitera is a Non-Resident Fellow at AICGS. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.