Germany Can Lead Euro Zone Out of Recession
With an external trade surplus of nearly 6 percent of GDP (gross domestic product), virtually balanced public sector accounts and stable prices, Germany has plenty of room for a vigorous stimulation of its stagnant domestic demand.
As an economy accounting for almost 30 percent of the euro area, Germany should stop living off its closest trading partners. By generating more of its growth from household consumption and investment spending, Germany would spur economic activity in the rest of the euro area and alleviate the hardship experienced by heavily indebted euro zone countries.
That would be an appropriate policy change for a country whose forceful advocacy of fiscal austerity measures have already pushed the European monetary union – nearly one-fifth of the world economy - into a recession of unknowable amplitude and duration.
As things now stand, the euro area will continue to exert a significant depressive impact on economic activity in the rest of the world for the foreseeable future because the current objectives of fiscal consolidation in France, Italy and Spain – roughly 50 percent of the area's economy – will remain elusive under conditions of declining output.
We are seeing that already in all of these three countries. Despite huge spending cuts and tax hikes, Spain's deepening recession and a quarter of its population out of work led last spring to a large upward revision of its budget deficit target to 6.3 percent of GDP for this year.
Spain was also forced to postpone to 2014 its deficit reduction to 3 percent of GDP. Italy has done the same: its budget deficit estimate for this year was nearly doubled to 2 percent, and the commitment to balance the books next year appears quite tenuous in view of an accelerating recession.
France's declining growth is also making its objective of bringing the budget deficit down to 3 percent of GDP next year (from an estimated 5 percent of GDP this year) increasingly questionable.
What is the solution? The answer is simple: A decisive shift toward growth-supporting measures, and longer fiscal adjustment periods.
The problem is that no euro area country, except Germany, has the means to support growth without watering down its deficit reduction programs – a move that financial markets would promptly sanction with rising interest rates. Similarly, any extension of the currently agreed schedules of fiscal consolidation would also trigger higher borrowing costs.
The best, and the safest, thing the euro zone can readily do is to convince Germany to help itself by helping its euro zone partners with stronger consumption and investments. Indeed, Germany's huge manufacturing sector is sinking, and the stagnant economy seems to have already slipped into recession.
Facing a general election in September of next year, Germany's fractious governing coalition should not need much convincing to prop up the economy with public spending and tax cuts. But, failing that, euro zone countries can also point to the unfairness of Germany's apparent intention to ride out the crisis on the back of exports to its struggling and deeply indebted euro partners.
Here are some numbers. In the first half of this year, nearly 70 percent of Germany's growth came from net exports as German companies – fleeing depressed domestic demand – sought survival in dumping their goods and services on foreign markets. And quite a bit of that dumping was done on euro zone markets, where German trade surplus in the first six months of this year was running at an annual rate of 20 percent above the surplus for 2011.
One can also note that during the entire period of this financial crisis (i.e., from the end of 2008 through the first half of this year) German trade surpluses with euro zone have been growing at an average annual rate of 3.5 percent.
Now, in case euro zone countries' entreaties with Germany were to fall on deaf ears – as will most likely be the case – they can enlist the help of the IMF's Managing Director Christine Lagarde who, while serving as France's finance minister, told Germany almost exactly two years ago that countries on the euro zone periphery (Greece, Ireland, Portugal and Spain) were not the only ones to blame for the monetary union's economic imbalances.
Germany, she said, was also at fault for "getting rich off exports to the rest of Europe." In other words, Germany was living off its euro partners whom it blames as irresponsible spendthrifts. Lagarde reiterated the same concern while visiting Berlin last January as the head of the IMF. Or, if persuasion from another U.N. agency was needed, Germany's euro area partners can also refer to this year's report of the International Labor Office (ILO), where Germany's export-led growth strategy was singled out as one of the underlying structural causes of euro zone's problems.
Germany, it seems, is duty-bound to its closest trading partners to stimulate the economy in order to restore growth and narrow destabilizing trade imbalances within the European monetary union.
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.