Getting tough with Germany?

by on June 12, 2010 at 12:04 pm in Economics | Permalink

Maybe I've covered too many Paul Krugman posts lately, but since he blogged Germany, and I'm now covering Germany, it's worth a quick look.  After proposing that we get tough with the Chinese, Krugman wrote:

And it’s also important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity.

Nicely, nicely isn’t working. Time to get tough.

Yet Germany already has passed a constitutional amendment mandating a more or less balanced budget by 2016.  Germany also has EU treaty obligations (admittedly, they broke them in the past, though I suspect they view those lawless days as behind them) limiting the German fiscal deficit to three percent of gdp.

Would trade sanctions on Germany lead to a trade war with the entire EU directly, or only indirectly?

There's also a distinction between a balanced budget and the overall level of government expenditure, the latter being quite high in Germany.  The German government spends a lot of money, in various ways, putting people to work.  It's called the city of Berlin!  Plus they have stronger automatic stabilizers than does the U.S..  Deficits are not the only tool of job promotion or aggregate demand promotion.

Germany also transfers a good bit of money (or for that matter political capital) to the poorer EU nations and in that manner boosts global consumption.  Not to mention the billions the country has borrowed and spent, designed to turn the Ossis into permanent consumers, including at a global level.

Germany, unlike China, has not been engaging in currency manipulation.  In large part German exports are so high because Germany is a productive economy, with quality outputs well geared to world markets.  There are plenty of fiscally austere countries, at various points in time, which do not have Germany's track record of export success.

You can make an argument that bundling with some weaker countries has artificially lowered the value of the German currency.  But even now the Euro is stronger than the deutschmark had been and in that sense Germany gave its currency an artificial boost, the opposite of what China has been doing.

It seems that Krugman is interested in helping the U.S. through a get tough measure.  Yet the last time Germany borrowed lots of money, spent massively on consumption, on an unprecedented scale, and ran a current account deficit…well, the country still ran a significant trade surplus with the United States.  Without the fiscal deficit maybe it would have been a bigger surplus, but still how much can we expect to gain here in terms of AD?

On another front, Germany is finding itself unable to much control the fiscal policies of Greece and they have entered in a common political union with a (supposedly) binding fiscal rule.  Germany also has numerous European countries on its side in its struggle with Greece and is much larger, relative to Greece, than the United States is to Germany.  If Germany can't control the fiscal policy of Greece, how much can we control Germany?

This is one "get tough" program that is headed nowhere fast.

1 Franklin Harris June 12, 2010 at 12:34 pm

If I were cynical, I’d say Paul Krugman is frightened that “austere” Germany will quickly recover and outperform the free-spending (yet never as free-spending as Krugman would like) U.S., so he’s trying to ruin Germany to avoid having egg on his face.

Wait. I am cynical.

2 jk June 12, 2010 at 1:09 pm

Krugman is attacking anything mentioning reducing government spending in order to fit his Keynsian worldview at any cost. I can’t imagine the amount of cognitive dissonance he is causing to the readers of the NY Times, he attacks Europe to promote the US!?

After Germany made reforms such as pushing retirement age back, Germany went from sick man of Europe to the export weltmeister (but even this may not be enough to offset how Germany continues to lead the way in Europe in aging and declining birthrates with the complementary increases in pension costs and healthcare costs, immigration can only do so much).

One should see Krugman’s myriad of articles on the “pain caucus” and the belief that the Greek government should spend more as opposed to tighten its belt in order to expand its economy.

3 Steven Schreiber June 12, 2010 at 1:22 pm

It’s possible that Germany will never run a balanced trade with the US and doesn’t really need to. It wouldn’t really be an indicator of a structural issue, either, because bilateral trade balances don’t really mean much.

4 dearieme June 12, 2010 at 1:46 pm

So not only is the US Federal government under the control of bloody adolescents, so is the commenting in the NYT?

5 Don the libertarian Democrat June 12, 2010 at 2:11 pm

“Euro continues to strengthen against dollar due to recovery optimism
Saturday, June 12th, 2010 at 3:02 am | BNO News

NEW YORK (BNO NEWS) – The Euro continued to strengthen against the U.S. dollar as investors and markets found more confidence and optimism in Europe’s economic recovery, the European Central Bank (ECB) announced.”

And:

“Bloomberg
Dollar Trades Near Four-Year High Versus Euro on Rates Outlook
June 09, 2010, 7:40 AM EDT

June 9 (Bloomberg) — The dollar traded near a four-year high against the euro on prospects for a U.S. economic recovery that will outpace Europe, where sovereign-debt concerns continue to weigh on growth.”

They can be harmonized, but this does have a kind of Duck/Rabbit feel to it.

6 k June 12, 2010 at 2:28 pm

Thank to China real wages in the USA are higher ,so you punish them for subsidizing America´s consumption?
And punish Germany for not being mad like the american Congress. “That that will be called madness in a household owner cant not be called otherwise in a country”
“Listen, pal, you can criticize Paul Krugman when you have a Nobel prize or two under your belt, and when you have earned a”
so he won a Nobel prize for Bushbashing so he can say stupid things without been criticized? He called Bush unilateralist Duhhh

7 FerrisMan June 12, 2010 at 2:36 pm

Juan, Juan.

Since when did the Nobel price confer infallability? Friedman won the Award for economics and would probably agree with Tyler on this. Does that mean that Krugman should go back to partisan hack opinion writing? If Krugman IS infallible, then you can save your time and stick to reading only the NYTimes.

8 Andrew June 12, 2010 at 3:53 pm

“you can criticize Paul Krugman when you have a Nobel prize or two under your belt”

You don’t see any logical problems with this?

Well, I’ve opposed two presidents since inauguration, so I’m a little over half way to being able to criticize Krugman.

9 Andrew June 12, 2010 at 4:21 pm

Krugman sure is an optimist.

10 thehova June 12, 2010 at 6:05 pm

Holy crap….that has to be the worst post I’ve seen from Krugman.

11 Thomas Esmond Knox June 13, 2010 at 1:07 am

Krugman had a different attitude to getting tough with Saddam Hussein.

To Krugman, Saddam Hussein good, Germany bad.

12 Roilad June 13, 2010 at 6:28 am

How shouldn’t one smile hearing someone talking about a country of obeses becoming tough ?

13 Ape Man June 13, 2010 at 7:25 am

Many people take it as a truism that if the nations with large current account surplus go into deficits, the beneficiaries will be those nations running large current account deficits.

I see this truism at work in Krugman’s arguments and I see this truism at work in the arguments that if only Germany would spend more Spain would be able to recover without hard choices (See (a href=”http://fistfulofeuros.net/afoe/economics-and-demography/the-economic-consequences-of-mr-hugh/”)here(/a) for an example).

Needless to say, this truism does not follow. If Germany would run a current account deficit, it is very likely that the only beneficiaries would be eastern Europe and Asia. Spain would still be in the fix that it is in because it does not make anything that Germany would be likely to want to buy (and Spain is pretty will saturated as a tourist destination).

Likewise there is no guarantee that the US would see any benefit from an increase in Chinese domestic spending. Indeed, the end result might just be higher prices for the US.

I won’t argue too strongly that I am correct because I don’t really know. And I am not arguing that the current imbalances are sustainable (China is not going to be able to export its way to success over the long term. It is to big relative to the rest of the world).

But it really bothers me when people just assume that getting the nations with current account surplus to spend more domestically will magically benefit the nations running the biggest trade deficits when there is no logical reason that says things must turn out thus.

14 DP Roberts June 14, 2010 at 12:09 am

Krugman is scared to death fiscal austerity will not only work, but become fashionable again.

15 TracyW June 14, 2010 at 9:49 am

Listen, pal, you can criticize Paul Krugman when you have a Nobel prize or two under your belt, and when you have earned a reputation for dogged opposition of a President from inauguration day until he left office.

How odd. I thought Tyler Cowan was managing to criticise Paul Krugman without these qualifications. Tyler’s criticisms might be misguided, but that’s a different matter.

Perhaps you intended to write “you should only criticise…”. In which case I would be curious as to what argument behind this assertion. Nobel Prizes are awarded based on recognition of cultural and scientific advances, they are not awarded based on proof that someone is absolutely infalliable.

16 John Dewey June 14, 2010 at 11:43 am

Krugman: “the United States has to take steps to protect itself.”

Just who would the United States be “protecting” if it took steps to reduce imports by U.S. companies and by U.S. citizens?

If my company decides that the precision measuring and testing equipment from a German manufacturer is what I need for my U.S. operations, how is the “United States” protecting me if it makes that purchase more difficult.

If I believe that driving a new Porsche Boxster around the streets of north Texas will improve my disposition, how is the “United States” protecting me if it slaps an extra import duty onto my purchase price?

What Krugman is suggesting is that the U.S. government restrict the freedom of all U.S. businesses and consumers in order to help the few.

17 John Dewey June 14, 2010 at 12:21 pm

not_scottbott,

The facts you provided certainly did not support your assertion. Just to refresh your memory, you said:

“Americans manufacture synthetic products based on dollars.”

There is nothing in the sentence you provided which says that the $148.8 billion U.S. exports in April were “synthetic products” as you claimed.

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