United States Blames Germany? What Nonsense.

For the U.S. Treasury to criticize German economic policies is rather rich.

October 31, 2013

In its Semiannual Report on International Economic and Exchange Rate Policies, the U.S. Treasury singles out Germany for a heavy dose of criticism:

“Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro area countries have been under severe pressure to curb demand and compress imports.”

The accusation that Germany is de facto pursuing a “beggar thy neighbor” policy has been around for many decades. It has become pretty widespread over the course of the euro crisis. But it is justified?

berenberg-blamegermany-chart
Chart: German trade surplus with Eurozone and non-EU, in % of German GDP. (Credit: Berenberg)

First of all, the Treasury Report to Congress is usually the place to criticize countries who depress their exchange rate relative to the U.S. dollar. To use that report to criticize Germany is rather rich, to put it mildly.

With the euro trading well above its long-term fair value of 1.25 to the U.S. dollar, the eurozone would have a reason to complain about U.S. policies that artificially depress the currency, not vice versa. The United States should be saying thank you to the ECB for pursuing a more responsible policy than the U.S. Fed.

Second, the trade data tell a rather different story than the U.S. Treasury report. Yes, Germany is running a big current account surplus of close to 7% of GDP. But that is not hampering any rebalancing within the eurozone. Within the eurozone, the German trade surplus has come down rapidly from a pre-Lehman peak of close to 5% of German GDP to 2% now (see chart above).

That is a significant adjustment. At the same time, Germany has managed to increase its trade surplus with the rest of the world including the United States.

But as Germany’s currency, the euro, is modestly overvalued, that cannot really be blamed on any German currency manipulation or the like. Germany is simply quite a competitive place. And as the rapid turnaround at the euro periphery from big current account deficits in 2008 to surpluses now shows, the euro periphery is also becoming fairly competitive.

Unlike U.S., Germany is not tightening fiscal policy

Third, the accusation that Germany compresses domestic demand to the detriment of its trading partners is simply wrong. Germany reformed its economy and cured its fiscal problems ten years ago. As a result, Germany today has a balanced budget.

And unlike the United States, Germany is not tightening fiscal policy. Instead, it will probably grant itself a small fiscal stimulus again in 2014. In real terms, German net exports in H1 2013 were 10% below their pre-Lehman level of 1H 2008. At the same time, final domestic demand had expanded by 3.5% in real terms.

Maybe the U.S. authorities, who seem keen to learn more about what’s going on in Germany, should check the statistics first?

Takeaways

The accusation that Germany is pursuing a “beggar thy neighbor” policy has been around for decades.

With the euro well above its long-term fair value, the eurozone has reason to fault US policies, not vice versa.

As Germany’s currency is modestly overvalued, its trade surpluses cannot be blamed on currency manipulation.

The US says Germany is compressing domestic demand, but the US is the one cutting budgets right now.