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Business/Finance See other Business/Finance Articles Title: News Analysis: Is U.S. right in criticising German economic model? VIENNA, Nov. 4 (Xinhua) -- Last week, U.S. Treasury Secretary Jacob Lew heavily criticized Germany's economic performance. In a report to congress, Germany is accused of provoking deflationary distortions in the world economy by relying too much on exports, while its domestic demand was "anaemic." This led to a huge surplus on its current account, balance of an economy's exports over imports of goods and services. By flooding foreign markets with its own goods and buying much less from other countries, so the criticism goes, Germany would hamper the necessary adjustment of trade flows and GDP growth, not only in the euro area, but in the world economy at large. This is not the first time that Germany faces such criticism of its business model. Similar charges have been raised in the past by Christine Lagarde, managing director of the International Monetary Fund (IMF). Likewise, German leaders like Chancellor Angela Merkel or Finance Minister Wolfgang Schaeuble have repeatedly been faced with such allegations in international fora like G8 meetings and other economic summits. The argument of the critics is essentially this: German economic policy is geared unilaterally towards exporting manufactures, boosted by cutting production costs through rationalisation and holding wages down. Low wages would constrain household consumption and domestic demand in Germany. If wages were higher and firms were to invest more, GDP growth would be driven more by internal demand forces and companies would produce to a larger extent for the home market. In addition, Germany would import more goods and services from the rest of the world and thus provide stimulus to the sluggish economies of its European neighbours and overseas. Is this criticism justified? Does Germany conduct a "beggar-my-neighbor" policy of protectionism? It is true that Germany's external surplus has recently increased to a high of 7 percent of GDP. According to data from the IMF, German surplus amounted to 239 million U.S. dollars in 2012. As a proportion of GDP, Germany recorded a current account surplus of 6.9 percent last year. This has not always been the case. In the late 1990s and early 2000s, the boom triggered by German reunification led to a bout of cost inflation and pushed the country's current account into deficit. The loss of price competitiveness led to a recession and a rise in unemployment to a record 5 million -- imbalances that were corrected subsequently in a painful process, when the German economy stagnated for several years. SURPLUS NOT RESULTING FROM PROTECTIONISM ... The revival of Germany's export strength since the late 2000s is mainly due to the restoration of competitiveness through rationalisation and productivity gains by firms investing in new technologies. It is not the result of an undervalued currency (as a member of the euro area, Germany has no control over its exchange rate; moreover, the euro exchange rate has followed an upward trend). Nor is it the result of wage dumping. While German labor cost has increased only modestly over the last years, it is still one of the highest in the world. Moreover, wage moderation has given rise to a sharp fall in unemployment and a strong rebound in job creation, which has broadened the base for private household consumption and domestic demand. Reversing the argument: an (artificial) upward push in wages, as called for by some observers, would not strengthen domestic demand if it would cause a jump in unemployment. ... BUT FROM HIGH PRODUCT QUALITY The fundamental reason for Germany's successful exports is not policy intervention, but the structure of its production and its technological advances. German machine tools, motor cars, chemicals or electronics are in high demand across the world for their high quality and reliability -- despite their relatively high prices. German manufacturers also benefit from the fact that they supply many of the investment and consumer goods that are most needed by the rising and fast growing markets of the globe, be it in eastern Europe, China, India or Latin America. For this reason, it is also misplaced to argue that Germany's export surplus would inhibit the recovery of the euro area crisis countries. The bulk of the trade surplus derives from the exchange with the dynamic overseas markets and not from intra-European trade. Thus, lower German exports would benefit countries like Greece, Portugal or Italy only marginally -- but it would at the same time undermine these countries' export opportunities, if as a result the European growth engine shifts into lower gear. Finally, focussing on current account surpluses and deficits is the wrong issue in the international economic policy debate. Neither a trade surplus nor a trade deficit should be taken as a target in itself, for any country. Thus, for emerging markets it is natural to run external deficits, because they have to import the machinery, technology and know-how they need for building up their manufacturing sector as the vehicle for catching up towards the richer countries. Likewise, an advanced economy with stagnant population enjoying a high living standard can be expected to accumulate foreign assets that can be invested at higher returns abroad, wherever foreign capital is most needed. It is true, nevertheless, that billions of foreign capital had been destroyed in the course of the global financial market crisis, and that German banks and companies better be more careful and take less risks by investing a larger part of their earnings into the real economy at home -- but that is another story. Editor: Mu Xuequan Poster Comment: If the Treasury Sec and his fellow duals in the administration were not preoccupied with military technology for fighting Israel's wars America too, like Germany, could be making high quality machinery for export, especially for oil-rich countries like Iran. Could be manufacturing high-speed rail for domestic and export market as China is doing now. Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest Begin Trace Mode for Comment # 1.
#1. To: Tatarewicz (#0)
The German mark if it were still around would be up where the British pound is. The rest of Europe pulls Germany down with their taxes and business regulations.
#2. To: Horse (#1)
And Germany is quite tired of supporting that entire fiasco. Let'er crumble, crash, and fall.
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