The need for a new equilibrium in global current account and trade imbalances has compelled American policymakers to urge Germany to change its model from that of an export-led economy to one based more on domestic consumption. This would be in keeping with the message delivered in July at the Peterson Institute for International Economics by Lawrence Summers, the White House economics counselor, that exporting countries should no longer count on an unlimited appetite for imports by the United States.
The question raised by the Americans is not unreasonable in general, but pressure on Germany in this direction might bring negligible results and even be counterproductive. For one thing, even if Germany were to cut its global trade surplus to zero, the effect on the American trade deficit would be marginal—about 0.2 percent of the US GDP, whereas at its peak the US current account deficit was nearly 7 percent of its GDP.
Instead of pressuring Germany directly, the United States should ask the eurozone members to coordinate their economic planning more deeply in order to enact a consistent growth strategy for the whole area. In the second quarter 2009 German recovery was again sharply driven by its export performance. This is sparking concerns that Germany could widen its trade surplus with its euro partners, deepening the divergent trend of its economy away from that of France, Italy, and Spain. This divergence could become politically problematic if other euro countries compensate for their loss of competitiveness by decreasing salaries or taking other steps to adjust their economies downward. Even the fear itself of a sustained divergent trend among euro countries would constrict bond and credit markets (and increase public debts), making the adjustment even more painful.
Furthermore, by which means could the United States induce Germany to adjust its trade surplus, or even its economic model, if not by adjusting the exchange rate? An excessively strong euro would penalize Germany's ability to export to the rest of the world, but not necessarily within the eurozone. In such a case the productivity disparity among the euro countries would become more—not less—relevant. Would it make sense for the United States to cause problems of sustainability inside the eurozone in order to gain a meager 0.2 percent of GDP?
The American vow to drive its own economy by exporting more does not mean that German consumers are going to be ready to buy more American goods. What is likely to happen is increased competition between the United States and the rest of the world for world market shares through cost efficiency. In such a competition, the most productive economies win. But the competition could also increase—not decrease—the strains among more and less productive countries in the same currency area. The displacement could even lead to painful social and economic consequences.
Fears of an economic divergence between Germany and its European partners had subsided during the initial phase of the current economic crisis, partly because of the resilience of the German consumer. During the winter German GDP fell around 6 percent. Germany's investments and its trade surplus lost cumulatively an equivalent amount of GDP. Government expenditures boosted aggregate output, leaving the contribution of German consumers in negative territory, but they were still slightly more buoyant than that of the rest of European consumers. But the figures coming out now show again a restraint in German imports and a remarkable strength of exports.
German businesses, which have undercut wage growth in other euro countries by a cumulative 25 percent in Italy since the start of the euro, have kept the level of German employment stable during the crisis. They are now expected to increase the pace of layoffs, but the cumulative effect of subdued wage growth and the effort to maintain the stable payroll should keep labor cost comparisons between Germany and euro countries unaltered in 2009–2010.
On the demand side, during the crisis, German consumption has outpaced GDP growth. Even gross capital formation declined less than exports. The reason for the resilience of the German consumer has probably resulted from the end of a secular downsizing in construction and the 2005 labor market reforms that tightened social security benefits and limited the duration of jobless benefits, making unions more susceptible to general market conditions. The new climate helped generate new low-paid jobs and new job schemes. Both were helpful in weathering the crisis and avoiding layoffs.
Based on the current trends on supply and demand, the relation between Germany and the other euro countries is not going to change. The level of German consumption, both private and public, remains particularly low. Even the level of German private investments is substantially lower than the euro average. So the structure of the German economy will likely remain export driven.
It is not particularly heartening to Europeans in other countries that German export performance has been led by its increasing success in markets of third countries outside the euro area, mainly in Asia. The rate of increase of German trade with third countries is consistently higher than that with the euro countries, but the German trade surplus (2007) is still derived 60 percent from the euro area and 40 percent from the rest of the world. Even though the import content of German exports is high (40 percent) and beneficial for European producers, the structural divergence between Germany and the rest of Europe remains and almost entirely results from the weakness of German internal demand. Shifting resources from the trade sectors to the non-trade sectors would require an extensive political effort and little short-term gain for the German government.
Many of us think that the worst of this crisis is over for the eurozone. Since March the euro has strengthened by 20 percent against the dollar and government bond yield spreads between Germany and those of other eurozone economies have narrowed markedly. The European Central Bank (ECB) says that the rise in spreads this year was mainly caused by liquidity fears, rather than anxiety over the eurozone breaking up. Still, the trade figures show that the divergence trend among the euro countries is a fact. And the huge public debts accumulated in all countries cannot be reduced in a recessionary environment in the eurozone that would undermine Europe's unity.
Washington should ask Berlin to address the problem of a global rebalancing by coordinating Germany's economy with its euro partners in order to avoid a recession-driven adjustment in Europe and to find a common way to stimulate the growth of the euro area. The obvious problem of coordination is a political one. But America has the right to call for a responsible Europe. It also has an interest in doing it while engaging in a delicate negotiation about global rebalancing with China.