Getting tough with Germany?

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.


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