Those depressing Germans
German officials are furious at America, and not just because of the business about Angela Merkelís cellphone. What has them enraged now is one (long) paragraph in a U.S. Treasury report on foreign economic and currency policies. In that paragraph Treasury argues that Germanyís huge surplus on current account ó a broad measure of the trade balance ó is harmful, creating ďa deflationary bias for the euro area, as well as for the world economy.Ē
The Germans angrily pronounced this argument ďincomprehensible.Ē ďThere are no imbalances in Germany which require a correction of our growth-friendly economic and fiscal policy,Ē declared a spokesman for the nationís finance ministry.
But Treasury was right, and the German reaction was disturbing. For one thing, it was an indicator of the continuing refusal of policymakers in Germany, in Europe more broadly and for that matter around the world to face up to the nature of our economic problems. For another, it demonstrated Germanyís unfortunate tendency to respond to any criticism of its economic policies with cries of victimization.
First, the facts. Remember the China syndrome, in which Asiaís largest economy kept running enormous trade surpluses thanks to an undervalued currency? Well, China is still running surpluses, but they have declined. Meanwhile, Germany has taken Chinaís place: last year Germany, not China, ran the worldís biggest current account surplus. And measured as a share of GDP, Germanyís surplus was more than twice as large as Chinaís.
Now, itís true that Germany has been running big surpluses for almost a decade. At first, however, these surpluses were matched by large deficits in southern Europe, financed by large inflows of German capital. Europe as a whole continued to have roughly balanced trade.
Then came the crisis, and flows of capital to Europeís periphery collapsed. The debtor nations were forced ó in part at Germanyís insistence ó into harsh austerity, which eliminated their trade deficits. But something went wrong. The narrowing of trade imbalances should have been symmetric, with Germanyís surpluses shrinking along with the debtorsí deficits. Instead, however, Germany failed to make any adjustment at all; deficits in Spain, Greece, and elsewhere shrank, but Germanyís surplus didnít.
This was a very bad thing for Europe, because Germanyís failure to adjust magnified the cost of austerity. Take Spain, the biggest deficit country before the crisis. It was inevitable that Spain would face lean years as it learned to live within its means. It was not, however, inevitable that Spanish unemployment would be almost 27 percent, and youth unemployment almost 57 percent. And Germanyís immovability was an important contributor to Spainís pain.
It has also been a bad thing for the rest of the world. Itís simply arithmetic: Since southern Europe has been forced to end its deficits while Germany hasnít reduced its surplus, Europe as a whole is running large trade surpluses, helping to keep the world economy depressed.
German officials, as weíve seen, respond to all of this with angry declarations that German policy has been impeccable. Sorry, but this (a) doesnít matter and (b) isnít true.
Why it doesnít matter: Five years after the fall of Lehman, the world economy is still depressed, suffering from a persistent shortage of demand. In this environment, a country that runs a trade surplus is, to use the old phrase, beggaring its neighbors. Itís diverting spending away from their goods and services to its own, and thereby taking away jobs. It doesnít matter whether itís doing this maliciously or with the best of intentions, itís doing it all the same.
Furthermore, as it happens, Germany isnít blameless. It shares a currency with its neighbors, greatly benefiting German exporters, who get to price their goods in a weak euro instead of what would surely have been a soaring Deutsche mark. Yet Germany has failed to deliver on its side of the bargain: To avoid a European depression, it needed to spend more as its neighbors were forced to spend less, and it hasnít done that.
German officials wonít, of course, accept any of this. They consider their country a shining role model, to be emulated by all, and the awkward fact that we canít all run gigantic trade surpluses simply doesnít register.
And the thing is, itís not just the Germans. Germanyís trade surplus is damaging for the same reason cutting food stamps and unemployment benefits in America destroys jobs ó and Republican politicians are about as receptive as German officials to anyone who tries to point out their error. In the sixth year of a global economic crisis whose essence is that there isnít enough spending, many policymakers still donít get it. And it looks as if they never will.
Paul Krugman is a columnist for The New York Times.