The Costs and Benefits of a German Straitjacket

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deutschland uber alles.jpgDuring the years following the fall of the Berlin Wall, Germany traded the geostrategic insecurity of a Cold War fault line and divided nation for a unified country with high levels of economic tension.  The transfer payments from the West to the East were politically and economically stressful.  The costs of reunification helped compel a rebalancing of accounts, a reduction in Germany's social welfare framework alongside renewed investment in its manufacturing and export sector.  China's mercurial growth and juggernaut manufacturing platform has been built in large part on German machine tools and equipment -- hitching Germany's economic fortunes to China's rising star.

Germany might have chosen not to trim its entitlement outlays to students, retirees, and displaced workers and to instead dig a deeper fiscal hole like many European countries.  For the most party, the German government chose to tilt toward austerity and investment, and the bets it made have largely paid off in the sense that it stands with China, Japan, and various of the Middle East oil states as a leading export-dependent, "surplus nation" while much of the rest of the global economic order wallows (or may be drowning) in debt.

In the Eurozone, however, Germany's success may ultimately lead to the unraveling of the economic and political binds that have tied Europe together.  

Germany, despite moments of leadership in the Euro crisis, has mostly been a 'euro late and kilo short' throughout the crisis.  As former Treasury Secretary Robert Rubin stated at the recent Washington Ideas Forum (sponsored by The Atlantic and Aspen Institute), European economic officials "have not done what needed to be done to get in front of the crisis."   Martin Wolf, the globally followed chief economics correspondent and Associate Editor of the Financial Times, has said that "Germany has not recognized its hegemonic responsibilities."  

While the European Central Bank has the authority and resources to guarantee $5 trillion across the financial institutions of Europe, the absence of centralized political authority has plagued and aggravated the financial crisis.  Germany is emerging as the nation that matters more than all others.  It is establishing itself as the central authority -- and that power is compelling other states into downward spirals of austerity and collapsed demand.

Now French President Nicolas Sarkozy has said that France must copy Germany and said "We have to repay our debts and work harder and better."  Sarkozy's conservative economic confidant and adviser Alain Minc, as reported by the Financial Times, has offered the remarkable comment:  "Finally the French people have been told what they have not been told for 30 years.  That the criteria for good economic management are the German criteria."

Many Germans resent the less efficient, seemingly more slothful, and economically reckless nations with which they share a currency and feel that they are being forced into a replay of the transfer payment misery of the 1990s -- this time not for their Eastern German brothers, sisters and cousins, but for Europeans who speak different languages and are distinct from German culture and history.

While political and media tributes abound at the moment for German Chancellor Angela Merkel's tactical decisiveness in the most recent Greece private debt write-off deal, few think that this is the end of the high stakes roller coaster ride.  Italy's borrowing rates actually surged to record highs after the Greece deal was announced -- not a sign of confidence that the destructive debt floodwaters had crested.  More importantly, German prescriptions that its European brethren need to don a "German straightjacket" and slash debt and consumption is a deeply flawed course.

France may be able to become more like Germany and diminish the gap between their mutual economic behaviors -- though the political costs may be high.  But all of Europe cannot do this.   Europe is too large to grow its economy fundamentally through exports.  China still is addicted to export led growth.  Though Japan has internal economic problems, it generates huge current account surpluses as it exports far more than it consumes.  As nations slash consumption and as key surplus counties like Germany and China build surpluses and reserves rather than invest and domestically consume, they are undermining the stability of the global economic order.  

On top of this export-addicted platform of the surplus nations, the largest economy in the world, the US -- which has not only moved interest rates and spending up and down to align with American economic conditions but also to balance global needs -- has no chance to kick-start its growth and employment levels without its own export-led growth strategy.  The world needs to put American workers back to work -- both for the health of the US and that of the entire global economic system.  Right now, nearly all key states want to grow through exports -- but those who would buy are victims in the crisis or, like China, have elected to stunt and constrain domestic consumption.

John Maynard Keynes warned of two key fears.  The first the commoditization of currencies, which has happened.  We live in a world where a glut of global capital sits next to screaming red balance sheets throughout the world.  The second fear related to nations pursuing excessive current account surpluses or maintaining structurally large deficits as these imbalances would eventually undermine confidence in the global economic order.  Today, we see surging currency reserves in many rising states as part of their economic protection strategy.  China has $3.5 trillion in reserves and pays higher than going market rates for forward based oil and energy contracts and other strategic resources.  China's behavior and those of other reserve accumulators are manifestations of fear about the future, not trust.  China is behaving like a hoarder -- and given its size and impact in the global economy, is ushering in the return of mercantilist behaviors among many states.

All countries cannot become Germany and China -- and if they were to follow that track -- a Hobbesian world of competitive currency devaluations, trade wars, further evolution of state-directed capitalism, and mercantilist recklessness could become the norm.

Germany may ultimately demonstrate some larger selflessness during this economic crisis -- but thus far, it has behaved grudgingly and late in its responses; it has traded economic policy action for the subordination of other states to German dominance; and it has forced austerity on states that may be permanently caught in the purgatory of economic stagnancy.  Germany's deal-making in the debt crisis is knee-capping consumption and undermining the middle classes of neighboring states, thus creating new political pressures that could burst open the tired seams of the European project.

The global economy needs to be incrementally rebalanced so that those who overproduce and over-consume each do less of each -- but Germany today is acting more and more like China -- demanding applause for small, reactionary steps of assistance -- but not realizing that it has responsibilities for the larger global good that it is failing to meet.


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Steve Clemons is Washington editor at large for The Atlantic and editor of Atlantic Live. He writes frequently about politics and foreign affairs. More

Clemons is a senior fellow and the founder of the American Strategy Program at the New America Foundation, a centrist think tank in Washington, D.C., where he previously served as executive vice president. He writes and speaks frequently about the D.C. political scene, foreign policy, and national security issues, as well as domestic and global economic-policy challenges.

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