ECONOMICS:Germans' views on international economic imbalances are very different from those of English speakers, writes DAN O'BRIEN
GERMANS MUST spend more. So must the Chinese and Japanese. All three countries underconsume domestically and export a lot. The result is that they run hefty current account surpluses with other countries. This is a central reason for destabilising global economic imbalances. Surplus countries need to stoke up demand at home so that they import the world economy back to balance.
Many serious people hold this view. Most of them speak English as a first language. Economically literate Germans almost all disagree. Some are irked by the position and others outraged. A big majority falls somewhere between the two.
One doesn’t hear the reasons behind the German view of global economic imbalances very much in the Anglophone media. They are worth listening to because German thinking on imbalances matters a great deal in the context of the pickle the euro zone has got itself into, which includes imbalances between centre and periphery.
They are also worth listening to because German thinking on many economic issues may be much more relevant to us if things here take a turn for the worse in the autumn.
The German narrative has two parts. It goes like this.
German companies have been extraordinarily successful at making products people want to buy. They have been as successful at containing costs. This winning formula means that German companies offer world-class product at prices people are happy to pay. This is a matter of pride, not shame. If other countries cannot get their exporting acts together, that is their problem. If they want to do something about it, they should emulate Germany, not berate it.
Besides, the notion that Germany is flooding the world with its exports is nonsense. The country’s share of the global market for manufactured goods has remained stable over the past decade at about 9 per cent, according to International Monetary Fund (IMF) trade data – China’s share, by contrast, passed the 10 per cent threshold in 2009, a near-threefold increase from 2000.
If other countries allow manufacturing to wither, that is their business. Making things matters for Germany and it is good that German firms are holding their own in the global marketplace.
Now consider the second part of the story – domestic consumption which is the main influencer of import levels. One of its determinants is the household savings rate. In Germany, this is neither particularly high nor particularly low compared to the past or other countries. Economies need to save so they can invest. Some countries forget this over the past decade, or dismissed it, as they imported foreign capital to finance investment.
Another important factor influencing domestic demand is credit, and the rate at which its economy-wide levels change. Germans are averse to borrowing. They are one of the few peoples in the developed world who have not increased their indebtedness in recent decades. Closely related to this, residential property prices have remained almost uniquely stable.
This allows Germans affordable housing and it means less volatility. If people elsewhere wish to use their homes as investment vehicles and borrow absurd amounts of money to satisfy a bizarre obsession with owning one (or two, or more), then let them go down that path. Be aware, though, that at its end are home repossessions and negative equity.
Germans prefer safer, if duller approaches. This means, among other things, the country can accelerate out of recession because it is not weighed down by debt, as illustrated by last Friday’s news of second-quarter gross domestic product (GDP) growth of an astounding annualised rate of 8.8 per cent.
That, in brief, is the German story. How plausible is it?
As its sympathetic telling may have betrayed, my view is that the Germans are more right in their analysis than wrong. Moreover, if they did irony, they might feel a little bitter that the same English speakers who lectured them for years about reducing government interference in the economy are now advocating that they increase it.
It is unimaginable that any German government would encourage households to borrow more and save less after all that has happened elsewhere. It is unrealistic to expect fiscal policy, which is still stimulatory, to play a bigger role given the economy is now growing healthily and public debt levels are already well above the Maastricht criterion ceiling of 60 per cent of GDP.
But there is one area where things are seriously awry in Germany – wages. This is the link between sluggish domestic consumption and strong exports.
Wage rates in Germany have gone through a period of stagnation when compared to that country’s recent economic history or that of any other large economy. In marked contrast to Ireland, where wages have overshot and need to fall to restore competitive balance, in Germany they have undershot and should rise.
But I have yet to hear anyone suggest how this can realistically be brought about. Wages in Germany are set by an intricate system of wage bargaining at company and sectoral level. In addition, as there is no agreed view on why wage growth has been stagnant for so long, it is very difficult to see how policy could boost wage growth.
It would be wonderful – for Germans and everyone else – if wages grew strongly in that country. Let’s hope it happens. But it will not change their analysis that imbalances – globally and in the euro zone – were caused by overconsumption in the deficit countries, not underconsumption in Germany.
Germans believe the burden of adjustment should fall on those who partied on into the night. As they are calling the shots, now more than ever in Europe, that is how it will be.
