Germany Can Complain, but the U.S. is Right on its Economic Policy

Hapag-Lloyd AG's "Hamburg Express" Container Ship in Port Of Hamburg

Could relations between long-time allies Germany and the U.S. get any frostier? First, Berlin was angered by revelations that Washington was listening in on German Chancellor Angela Merkel’s phone conversations. Then Washington added fuel to the fire by attacking German economic policy.

In a report released Oct. 30, the U.S. Treasury Department criticized Berlin for following policies that it claimed contributed to the severe economic woes confronting the euro zone. An obviously annoyed Berlin was quick to fire back, defending its policies and calling the Treasury’s critique “incomprehensible.”

Clearly, the timing of the Treasury’s report could not have been worse. And to be fair to Germany, Berlin has been instrumental in backing the bailouts that helped stabilize the euro zone’s debt crisis.

“The Germans are also often given far too little credit for what they have already done to keep the euro zone together,” Gideon Rachman wrote in a Financial Times blog post. Even more, the U.S. has little right to be criticizing anyone else these days, since its own policies have not shown the utmost responsibility. The political shenanigans over raising the debt ceiling, for instance, threatened the entire global economy.

Still, on purely economic grounds, the U.S. makes a sound point. German growth depends on exports and it notches up a large current account surplus — of nearly 7% of its GDP in 2012, according to IMF data, significantly higher than China’s often-criticized surplus. That pushes its weaker neighbors into deficit, putting pressure on their already depressed economies.

As the Treasury report put it: “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 in order to promote adjustment.” In other words? “The net result has been a deflationary bias for the euro area, as well as for the world economy.”

Germany sees things differently. In Berlin’s response to the Treasury report, it said that its surplus is “a sign of the competitiveness of the German economy and global demand for quality products from Germany.” That is true. Germany runs a surplus because its export industries are more efficient and competitive than others in Europe. But U.S. officials and many economists have been arguing for years that Europe would be better off if Germany reduced its surplus by stimulating consumption at home. By doing so, Germans would (at least in theory) buy more from the rest of the euro zone, narrowing the German surplus, stimulating growth in its neighbors, and helping to alleviate some of the pain of the debt crisis.

Berlin, though, has consistently refused to support pro-growth policies for Europe — instead favoring heavy austerity to force reform in Spain, Greece and the zone’s other crisis-hit economies. There is little doubt that such a stand contributed to the worst-ever recession in the euro zone and to ridiculously high unemployment.

So German policymakers can protest all they want. On this one, the U.S. is right.