Germany needs to play smart
With only 1 per cent of world’s labour force, last year Germany produced 10 per cent of global exports.
With Greece once again nearing default, calls are going out this week for Germany to step in to help. And many Germans are, once again, responding with indignity, saying they shouldn’t have to bail out their profligate neighbours.
But there is another reason Germany should resist demands to intervene, one that Chancellor Angela Merkel can hardly express publicly. Though Germany is undeniably Europe’s strongest economy, its outlook is not nearly as rosy as people imagine. And while a bailout might seem to help in the short term, it would make it harder for Germany to lead in the place where it really matters: creating a fiscal union, a United States of Europe.
A quick checkup of Germany in early 2012 would give the country a clean bill of health: It grew at about 3.5 per cent in 2010 and 2011, outperforming the rest of the Group of 8 countries, as well as the consensus forecasts. Moreover, despite the recession, the number of people unemployed, well above five million just a few years ago, has been cut by almost half.
Success story
Germany’s success story does not end there. German companies continued to increase their market share in world exports. With only about 1 per cent of the world’s labour force, last year Germany produced about 10 per cent of global exports. And the value of its exports of goods and services exceeds that of its imports by something like 150 billion euros, about 5 per cent of Germany’s GDP. It is this current account surplus that has convinced economists from Munich to Cambridge that Germany is benefiting at the expense of countries with a current account deficit, particularly its southern European partners.
For one thing, Germany’s position is hardly permanent. Its labour force is growing older, and as we have seen in Japan, a country with a high savings rate and a current account surplus can quickly turn into a low-savings and current-account-deficit country as its population ages. Moreover, the view that Germany must reduce its current account surplus ignores the interconnectedness of European economies. If a country like Germany is successful in exporting investment goods and cars to emerging markets, it pulls its neighbours along.
This view also ignores the fact that a strong German export sector acts as a sponge for surplus labour in other countries unemployed workers in Madrid or Athens can easily move to Munich or Cologne for work. But the fact is that, even without a German-led bailout, the German economy is poised for a slowdown. Many economists expect growth to be well below 3 per cent this year; my own guess is that it will come in around 1 per cent.
Such expectations are hardly secret, and they reinforce the German public’s fear of aggressive action right now. After all, the international community appears unaware of the sobering experiences that Germany’s taxpayers have gone through in the last two decades. By the middle of this decade, the equivalent of up to 100 per cent of Germany’s annual GDP will have been spent to finance German reunification alone. This will have amounted to an annual contribution of 4 per cent of GDP for nearly a quarter century.
Most of it is being financed through a slowdown in government investment in western Germany and limits on social spending, higher taxes and social contributions. One-third of that investment, however, has been shifted onto the shoulders of the next generation as debt. In fact, the country’s debt-to-GDP ratio has risen from just below 60 per cent to almost 80 per cent, a bearable number in a strong economy but dangerously high should things slow down. Is now a time to rejoice? Is Germany the star performer, the role model to be emulated? Or is the start of 2012 just a snapshot, showing a series of lucky coincidences that should not be misread as structural strengths? With some qualifications, I believe it is the latter.
With that in mind, Germany should not squander its recent gains through ill-advised macroeconomic policies. It should strive for sober policies, promoting sustainable reforms in Greece like privatisation, an efficient tax collection system and modernisation of the tourist industry.
Germany has learned the hard way that monetary union without some unification of fiscal policy making, and ultimately without political union, does not work. While today – on average – national parliaments control 50 per cent of the European Union’s GDP via the public sector, the budget of the union itself amounts to just 1 per cent of GDP. Instead of looking to Germany for short-term bailouts, Europe should demand that Germany lead the way to a true fiscal union. It is a challenging task, but one that Merkel and the German public are willing and able to meet.
(The writer is chief economist emeritus for Deutsche Bank)
