No Sound Defense of German Mercantilism, Nowhere

In “America’s misplaced lecture to Germany,” Gideon Rachman ends up offering a singularly misplaced defense of Germany. Quite similar to the typical stories one hears on this matter in Germany itself, Rachman appears to be unaware of how self-contradictory his arguments really are. To begin with, after describing the Federal Reserve’s QE policies as both a vital support to the world economy and an addictive drug, he goes on to identify the markets’ reaction to tapering by the Fed as the “biggest threat to the global economy in the coming year.” Does he suggest here that, once adopted, QE policies can never be reversed without causing market turbulences and that QE policies, therefore, should never have been adopted in the first place? That would beg the question as to what else would have provided that vital support to the world economy which Rachman himself attributes to these very policies.

The real issue here is why such overburdening responsibility for supporting the global economy has come to rest on the Federal Reserve’s shoulders. Apparently without seeing the connection, Rachman supplies one reason himself: the “particularly mindless game” of toying with defaulting on the national debt on the part of the US Congress that has accompanied harsh fiscal contraction in the US this year.

Another reason is to be seen in the fact that Europe’s economy, especially the eurozone under German austerity leadership, has been shrinking for years. Europe is still the US’s most important trading partner. It may be a matter of annoyance rather than envy that US firms find themselves exporting into a shrinking market while German firms enjoy participating in the recovery of their important US market. Globally, then, QE may also be seen as a defense against bloated German export surpluses, benefiting from a euro exchange rate that is way undervalued as far as Germany is concerned.

But Rachman also refers to the situation inside the currency union, attesting that Germany has generously provided large-scale bail-outs for its eurozone partners in crisis. Again, he is missing an important connection here. Prior to the global crisis, Germany’s export surpluses had their counterpart mainly in Europe, about two-thirds inside the eurozone. Germany’s corresponding foreign investments were even more regionally concentrated. Essentially, and quite predictably, Germany’s perpetual export surpluses have bankrupted its euro partners—with rather uncomfortable implications for their German lenders (and German taxpayers ultimately backing them). By then providing so-called bail-outs (i.e., more loans) and tolerating support from the ECB’s balance sheet, Germany has primarily done itself a great favor, at least temporarily, namely by avoiding bail-outs of German banks. Alas, Germany’s euro partners have experienced a continued rise in indebtedness as their economies are shrinking under austerity wreckage. This too has implications that go well beyond German taxpayers’ pockets.

The US Treasury is to be commended for highlighting that German mercantilism is both regionally and globally irresponsible. The German authorities’ knee-jerk response that German current account surpluses are no problem for either Europe or the world economy reflects their continued denial and delusion. Germany itself cherishes the habit of lecturing other countries on their supposedly flawed policies, aloof to the fact that those very policies are necessary to make the German mercantilist model work at all. Rachman appears to have adopted that habit as his own. It is not a good habit though.