Germany's Export Obsession Is Dooming Europe to a Depression

The euro zone desperately needs more inflation and more spending, but Germany won't allow either because it doesn't want to lose its trade surplus.

Europe is in a depression, because Germany is afraid of a recovery.

It's afraid that more inflation and more spending would wreck its export-led growth model. And afraid that southern Europe would stop trying to adopt that model if they had an easier way out. So Germany has left them no way out.

Now, the euro zone's latest recession has officially ended, but the euro crisis has not. That crisis is one of competitiveness. During the boom, money poured into southern Europe, blowing bubbles and pushing up wages. Then the bust came, and the money stopped. That left them with too little demand, and too high wages—and no real way to escape. If they had their own currencies, they could have just devalued to regain competitiveness. But they don't have their own currencies. They have the euro. So they need to cut their wages relative to their competitors—to Germany, really.

But Germany isn't making that easy. It doesn't want to "sacrifice" its trade balance just for the sake of Spain or Italy's. See, Germany has turned itself into an export machine the past decade by holding worker wages down. That's let it sell things abroad for less. But it hasn't bought more from the rest of the world even as it's sold more to the rest of the world—it's saved more instead. In other words, it's run up a prodigious trade surplus. It's a strategy that's worked well for German GDP, though not for German workers. And a strategy that can't work for everyone at once. There have to be buyers to match sellers. The euro's problem, as the U.S. Treasury points out, is Germany wants the rest of Europe to become sellers too, but isn't willing to buy more itself.

Germany, of course, calls this criticism "incomprehensible." Its Economics Ministry thinks that its massive trade surplus just shows the "strong competitiveness of the German economy and the international demand for quality products from Germany." But that's a non sequitur. Germany doesn't have such a big trade surplus because it sells so many quality products. It has such a big trade surplus because it sells so many quality products and it buys so little. Nobody is asking Germany to stop making quality products. They're asking Germany to start paying their workers more and to start buying more from abroad. In other words, to tolerate a bit more inflation and government spending.

But the opposite has happened. Germany has fought any and all monetary easing out of fear of nonexistent inflation. And it really is nonexistent. In October, overall euro zone inflation fell to a four-year low of 0.7 percent, while German inflation was just a tad higher at 1.2 percent. Despite this, Germany's central bank still opposes easier money, because it sees the specter of inflation in ... apartment prices in its major cities. It'd be funny if it weren't dooming southern Europe to a depression. See, with German prices (and wages) rising so slowly, Europe's crisis countries can't regain competitiveness by having their own just rise slower. They have to cut wages instead—which, as Iriving Fisher pointed out back in 1933, can throw an economy into a death spiral by making debts harder to pay back.

Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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