GO
Loading...

By staying coy on Germany, US is failing the euro zone

A shopping street in Steglitz district in Berlin, Germany.
Getty Images
A shopping street in Steglitz district in Berlin, Germany.

U.S.-led appeals to the euro zone to stimulate economic growth and create jobs are turning out to be, well, empty talk. There is no collective effort of that kind that the single currency bloc can – or is able to – undertake. And while the one country that could make a difference is Germany, it is unlikely to make a meaningful contribution to the region's overall economic recovery.

The question remains: why is the U.S. so coy about telling Germany that its huge trade surplus (i.e., excess savings) of 7 percent of gross domestic product (GDP) is not a good idea at a time when nearly three-quarters of Washington's other euro zone trading partners are in recession, battling rising poverty, experiencing evisceration of essential public services and struggling with a politically intolerable mass unemployment of 19.2 million people (12.2 percent of the labor force), of which 3.5 million are young people under the age of 25?

(Read More: Lew to Europe: Focus on growth and jobs)

After all, the IMF's Managing Director Christine Lagarde dared to say much more at the height of the euro zone's financial crisis, when she was still serving as the French finance minister. She faulted Germany for structural problems in the monetary union because it was "getting rich off exports to the rest of Europe." She reiterated the same criticism while visiting Germany in the early months of her IMF mandate.

Another U.N. agency expressed the same view. In its 2012 annual report, the U.N.'s International Labor Office (ILO) singled out Germany's export-led growth strategy as one of the underlying structural causes of euro area's problems.

These two examples show that there is nothing new, or unprecedented, about calling out Germany's failure to coordinate its economic policies within the euro area – an essential step in ensuring the viability of the monetary union among sovereign nation states.

(Read More: Germany to blame for euro zone crisis: Study)

And Washington does not have to stretch and strain the argument about Germany's moral obligation to reduce its huge excess savings of 190 billion euros ($240 billion) by stimulating domestic demand so that its hard-pressed euro partners can sell something to pull themselves out of the hole. With inflation under control, balanced public sector accounts, large trade surpluses and a stagnant economy, Germany is a textbook case of a country that should vigorously expand its domestic spending.

There are two main reasons why I think Washington should urge Germany to stop exporting recession and unemployment to its trading partners. Firstly, because there's no one else Germany will listen to. Secondly, the German trade surplus with the U.S. in the first five months of this year is 13 percent above its year-earlier level. At about 10 percent of America's total trade gap, German surpluses are a drag on its economic growth and employment.

Regrettably, the U.S. seems unwilling to do anything of the kind. On his way to Moscow for the G20 meeting of finance ministers (held on July 19-20, 2013), the U.S. Treasury Secretary Jack Lew was saying that "Europe needs to look closely at using its macroeconomic tools to drive growth up and unemployment down."

(Read More: Euro zone output down in may as recovery remains fragile)

What macroeconomic tools? Fiscal policy?

That is absolutely impossible for any euro zone country to execute, apart from Germany. No other country of that region could imagine a fiscal stimulus without a swift and severe market sanction with rising interest rates, or a virtual exclusion from international bond markets.

Just consider what is happening to budget deficits and public debt of major euro zone borrowers. Over the last two years, France and Italy made no meaningful progress on narrowing their budget gaps. During the same period, public finances in the sinking economies of Spain and Portugal worsened considerably. And none of these four countries – representing 52 percent of the European block economy – will see any improvement this year.

(Read More: Is a perfect storm brewing in euro zone?)

The public debt situation is even more alarming. As a share of gross domestic product (GDP), public debt is expected to reach 144 percent in Italy this year, 143 percent in Portugal, 114 percent in France and 100 percent in Spain.

That is how desperate the euro area fiscal situation is.

Medieval Medicine: Bleeding and Purging

The euro area's monetary policy – the other macroeconomic instrument Mr. Lew has in mind – is equally incapable of triggering an early recovery in output and employment. The European Central Bank (ECB) has provided plenty of cheap loans, but there are not many creditworthy private sector borrowers at a time of rampant unemployment and soaring bankruptcies. Banks are, therefore, lending money to governments instead of funding businesses and households.

The most recent statistics show that the rate of decline of bank lending to the private sector in the euro area nearly doubled to 1.1 percent in the three months to May, while lending to businesses kept dropping at an annual rate of more than 3 percent.

This is what some market watchers mean when they say the ECB's policies have no traction – i.e., when the transmission mechanism between the monetary policy and the real economy is broken. As the case of the U.S. shows, that mechanism eventually gets repaired, but it takes time – sometimes a very long time – until large-scale transactions between lenders and borrowers can resume at mutually acceptable risk-adjusted terms.

We are still far from that point in the euro area.

That is why the call by U.S. Treasury – fully endorsed by the just finished G20 meeting – that the euro area should focus on stimulating growth and employment is empty talk.

No wonder Germany could agree to that. In fact, that empty talk is what suits perfectly Germany's inward-looking leaders in the run-up to next September's general elections.

(Read More: IMF's Lagarde says may trim global growth forecast)

More ominously, it also shows that the U.S. and the IMF are acquiescing in Germany's thoroughly discredited euro area policies. Germany's demand for harsh austerity programs in recessionary euro area economies is what started the bleeding in the first place. To complete the treatment, Germany has insisted on the purging therapy of economic reforms whose inevitable short-term impact is employment destruction.

The U.S. Treasury and the IMF's Christine Lagarde know better. The voiceless France, Italy and Spain desperately need their help to avoid long years of rising poverty and debilitating social unrest.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

Featured