American-German divide on macroeconomic policy alive and kicking
by Jörg Bibow, Skidmore College
Developments surrounding the recent G-20 summit further underlined some starkly conflicting views among key global policymakers, an important “American-German divide” in matters of macroeconomic policy in particular. For instance, referring to the Federal Reserve’s latest quantitative easing (“QE2”) initiative, Germany’s finance minister Wolfgang Schäuble briskly attacked U.S. policy as “clueless” and “irresponsible”. In his view, it is inconsistent for the U.S. to accuse the Chinese of exchange rate manipulation while steering the “dollar exchange rate artificially lower with the help of their printing press”. While highlighting that the final remnants of global policy consensus at the G20 level have evaporated, Mr Schäuble is clearly missing the real inconsistencies in international policymaking today.
Take Mr Schäuble’s assertion that Germany’s export success was not based on any exchange rate tricks, but on increased competitiveness. This would seem to imply that the euro’s decline from $1.50 to $1.20 in the context of Europe’s so-called “sovereign debt crisis” was neither a competitive depreciation nor any other kind of exchange rate trick, but a legitimate booster of German competitiveness; conveniently super-charging Germany’s export engine though. Rather less convenient, at least from the viewpoint of the rest of the world, is the fact that austerity across Europe will do little to boost German and European imports – when Europe happens to be the U.S.’s most important export market.
While China has gone through a fundamental policy shift since the global crisis, Germany is simply returning to bad old habits. In fact, China’s current account surplus has declined sharply from 10 percent of GDP towards 4 percent; close to Mr Geithner’s proposed cap for imbalances. By contrast, Germany’s ballooning external surplus has soared back to 6 percent of GDP (with the OECD forecasting a continued rise to 7 percent of GDP, close to the pre-crisis 8 percent peak level). Ironically, it was mainly China’s massive stimulus program that bailed out Germany’s peculiarly unbalanced export model, replacing depressed export markets in the crisis-stricken European periphery. That German policymakers should lend their voices to pressures for more renminbi appreciation reflects a freeloading propensity of embarrassing dimension.
Even worse, it is official policy today that the rest of Euroland has to emulate the German model, which would turn Euroland into a large trade surplus zone. The rest of the world may not like that prospect all that much though, not least the US, and for good reasons. To be sure, even if the German Euroland strategy were to come about, the US would still be facing continued accusations of running irresponsibly large current account deficits, most certainly from Germany. For from a German perspective the sins of running budget or current account deficits are to be addressed by nothing but austerity, as the panacea fostering both growth and competitiveness. That austerity has never ever fostered growth in Germany but competitiveness only is a fact conveniently ignored – a trick that has worked for Germany precisely because others refuse to buy the austerity-fosters-growth fiction, graciously making Germany’s export model viable in the first place.
At the current juncture there is a serious problem though: U.S. external deficits internally require overspending by some U.S. sector. Alas, neither households nor businesses are currently sufficiently forthcoming, while Congress looks disinclined to do more deficit spending either. In other words, to the U.S. the dollar is something of an “exorbitant burden” rather than a privilege right now, with dollar diplomacy à la QE2 emerging as last line of defense against exchange rate tricks and export successes of others.
Mr Schäuble may be annoyed that anyone should dare to challenge what he seems to see as Germany’s monopoly right for competitive depreciation and beggar-thy-neighbor trickery, as he had to watch the euro rise back towards $1.40 following the Fed’s QE2 announcement. Meanwhile, a German initiative to establish a sovereign bankruptcy regime with private investor bail-ins in Euroland by 2013 has triggered another “rescue package” (this time allegedly “benefiting” Ireland) and renewed euro weakening. With never-ending German calls for savage austerity and renewed market fears of contagion on the rise, Euroland is re-confirming its status as global hot-spot of instability. As pointed out in detail elsewhere, Euroland’s policy regime is based on pre-historical German doctrines that are bound to leave any currency union dysfunctional. More by accident than by design, Germany herself is doing rather well at the moment. On top of the China factor and low interest rates due to its haven status, one has to acknowledge that Germany got lucky in 2009 in successfully implementing policies the Keynesian character of which the German authorities may be keen to deny. More generally, when it comes to “clueless” and “irresponsible” economic policies, German policymakers are truly in a league of their own.