“Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.
You may have heard of Chimerica – a neologism invented by Niall Ferguson, the Harvard historian, and Moritz Schularick of the Free University of Berlin, to describe a supposed fusion between the Chinese and American economies.
You may also have heard of Chindia, invented by Jairam Ramesh, an Indian politician, to describe the composite new Asian giant.
Let me introduce you to Chermany, a composite of the world’s biggest net exporters: China, with a forecast current account surplus of $291 billion this year and Germany, with a forecast surplus of $187 billion.
China and Germany are, of course, very different from each other. Yet, for all their differences, these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses.
Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit.
If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.
I am beginning to wonder whether the open global economy is going to survive this crisis. The euro zone may also be in some danger. Last week’s interventions by Wen Jiabao, China’s premier, and Wolfgang Schäuble, Germany’s finance minister, illuminate these dangers perfectly.
Does Germany Want to Leave the Euro?
The core of Mr Schäuble’s argument was not about the mooted European Monetary Fund, which could not, even if agreed and implemented, alter the pressures created by the huge macroeconomic imbalances within the euro zone.
His central ideas are: combining emergency aid for countries running excessive fiscal deficits with fierce penalties; suspending voting rights of badly behaving members within the euro group; and allowing a member to exit the monetary union, while remaining inside the European Union.
Suddenly, the euro zone is not so irrevocable: Germany has said so.
Three points can be drawn from this demarche from Europe’s most powerful country: first, it will have an overwhelmingly deflationary impact; second, it is unworkable; and, third, it might pave the way for Germany’s exit from the euro zone.
I explained the first point last week. If Germany gets what it wants, the world’s second-largest economy would play an altogether negative role in the search for a way out from the global slump in aggregate demand. The euro zone would not be exporting the demand the world now needs. It would export excess supply, instead.
Imagine that weaker euro zone countries were forced to contract their fiscal deficits sharply. This would surely weaken the entire euro zone economy. But the result would also be fiscal deterioration in Germany and France.
Imagine that Germany then did don the hair shirt. Would it instruct France to do the same? After all, France already has a general government deficit forecast by the Organization for Economic Co-operation and Development at close to 9 percent of gross domestic product this year.
Does Mr Schäuble imagine France could be fined? Surely not. Yet it is not Greek public finances that threaten the stability of the euro zone. These are a mere bagatelle. The threat is the public finances of big countries.
Since Germany could not force such countries to behave and has no chance of expelling any member it disapproves of from the euro zone, it would have to leave itself. That is the logic of Mr Schäuble’s ideas. This must be obvious to him, too.