A Common Currency (Euro) is Europe’s Real Problem, Not Germany’s Trade Surplus

Background

David Wessel’s 3/7/2013 article in The Wall Street Journal, “A Chinese Lesson for Germany,” compared China’s dealing with its trade surplus to the track Germany has taken.  It began with the surprising statistic that Germany’s trade surplus as a percentage of GDP is 6.4% compared to China’s 2.6% down from its peak of 10% in 2007.  The purpose of his writing was to say that China’s monetary policy was more beneficial to its economy, with a side benefit to the rest of the world, while Germany’s stubborn goal of significant trade surpluses was hurting Europe as a whole.

Does  a  Stagnant  World  Economy  Mean  Some  Virtues  Are  to  be  Discouraged? 

Mr. Wessel acknowledged that at any given time there will be both net importing and net exporting countries.  However, his main concern was that in this particular economy which “is starved for demand,” a non-growing global economy means “a strong economy (Germany’s) that runs a big trade surplus is taking away someone else’s lunch.”  He went on to say that this problem “is particularly acute in Europe” because “Southern Europe is struggling to increase exports and use the proceeds to pay debts.”  So, is this to suggest that Germany is the bad guy because its disciplined economy does not have to pay the pied piper as other countries must?

“Every decrease in the trade deficits of Portugal, Spain and Italy has to be matched by a decrease in someone else’s trade surplus.”  True, but why must it be Germany’s?  Is it the main exporting opportunity for these countries?

“China  Gets  It”

Oh, really?  After years of not allowing its currency to seek its true value in the world market, now they are to be praised?  “It has allowed its currency to rise against those of its trading partners, which makes its exports less attractive.  It has spent heavily on investing in everything from steel mills to airports.It is allowing labor shortages to push up wages, which gives consumers more spending power.2… China’s leadership preaches the virtues of enhancing people’s ability to consume.3   And the yuan hasn’t been replace with a common currency either.

Germany’s  Approach

The writer didn’t hide his slant with: “The rigid German business model dates back to the 1950s… Germans saved a lot, and spent less.  Producers relied more on selling to foreigners.”  He should have respectfully called it a “disciplined” business model, but he couldn’t with the Chinese “virtues” just mentioned.  And, in the U.S. we have the problem of not saving.  Do we have any experience with excessive saving?

How  the  Euro,  or  Any  Common  Currency,  Restricts  Natural  Market  Forces

As the writer recounts the normal activity of an unrestrained currency: “A period of strong exports and growing trade surpluses would push up the deutsche mark.  The rise in the currency would curb exports.  That would increase unemployment, and laid-off workers rarely moved to other industries.  That, in turn, would provoke a burst of productivity that restored international competitiveness; exports would rise again.”  Wouldn’t the decrease in exports also see the rise of imports, increasing some jobs at least?

Anyway, the writer “gets it here.”  He says, “The advent of the euro disrupted the usual equilibrating move in exchange rates.  If Germany still had the mark, the currency would be soaring, diminishing exports.  But the mark has given way to the euro, and the Continent’s woes restrain the currency from climbing.”  So, even though the problem is caused by the common currency, we see him blaming the German people for being industrious with: “So Germany enjoys an export boom.  Its advice to the rest of Europe: We made our manufacturers more competitive.  We cut our budget deficit.  You should, too.”  Is he mocking those who reap the benefits of honest hard work.  Just a moment, did President Obama write this?

Must  the  Euro  Be  Saved?

That seems to be Mr. Wessel’s point.  He went on: “That approach (Adam Posen’s statement that Germany sees export success as a goal rather than a means to an end4), though, threatens the viability of the euro.  It threatens the prospects that Southern Europe will be able to pay back the loans that Germany’s savers, banks and governments have made to them.  It hurts the global economy.”  But, it appears that by eliminating the euro and the deutsche mark would correct the situation.  

And  Keynes  to  the  Rescue!

“Keynesian textbooks prescribe more government spending and bigger budget deficits for Germany, but that’s not going to happen.”  Perhaps, because the Germans have seen what unbridles Keynesian economics has done for the U.S. and others?

He adds, “A surge in business investment would be welcome, but companies aren’t so inclined.”  Even if they are as selfish as this article implies, German businesses will be smart enough to reinvest to keep their implied greed satisfied.  Believe me.  They didn’t achieve this success, in the midst of irresponsible countries everywhere, by being stupid.

Concluding  Remarks

“Reducing a trade surplus to zero essentially means a society consumes as much as it produces.  The notion that consuming what you produce is punishment is uniquely German.”  He closed with, “Perhaps Germany could learn a little something from China.”  For what?  For being successful while maintaining a free society?

This article is uniquely socialist in its indignity.  The German people have no need to apologize.  And with that, no further questioning, I rest my case.

1 – and major pollution, but that’s another story (see “Beijing Pollution Hits Highs,” by Wayne Ma, The Wall Street Journal, 1/14/2013 and “Japan seeks cooperation with China on smog problem,” by Elaine Kurtenbach (Associated Press), Cincinnati Enquirer, 2/10/2013)
2 – until inflation sets in, of course
3 – “China, virtue and consume” in the same sentence?  Who would have thought?  Baby Boomers and their parents getting dizzy about now?
4 – Adam Posen of Washington’s Peterson Institute for International Economics

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