BY MAULDIN ECONOMICS
BY MAULDIN ECONOMICS
At the center of the European Union is Germany whose export-dependent economy is gradually falling apart. (Geopolitical Futures, in partnership with Mauldin Economics, has published a detailed study of the German economy.
The German economy has thus far been able to avoid the crisis of the exporters that has affected every other major exporting country in the world—from the producers of manufactured goods like China and South Korea to commodity exporters like Russia and Saudi Arabia.
The US Treasury Department recently announced that the US would monitor China, Japan, Korea, Taiwan, and Germany for potential currency manipulation. The report noted that Germany has built up a significant bilateral trade surplus with the US, in addition to holding the second-largest current account surplus in the world, at approximately 8.3 percent of GDP.
It isn’t currency manipulation that has put Germany on this monitoring list. It is the fact that European and Chinese demand for German products has fallen. As a result, the US has become the destination for Germany’s exports in order to make up the difference. Export to the US, however, is a Band-Aid on a deeper wound.
There are a number of factors besides exports that go into Germany’s current account surplus. Germany has become a significant creditor. Its net foreign assets rose from almost zero in the 1990s to around 40 percent of GDP by the end of 2010, according to economic scholar Jörg Bibow.
Interest rates are low, and German banks are viewed as a safe haven in the European Union for stashing money. But since Germany is a creditor, many of the assets on German books are the unpaid debts of other eurozone countries. That means Germany is deeply exposed to a eurozone that still has not meaningfully recovered from the 2008 crisis.
Account surplus is usually seen as a positive. But if Germany has a surplus of 8.3 percent of GDP, why not use that surplus to stimulate domestic demand? Germany must be either unwilling or unable to use the surplus to stimulate domestic demand. This is in part because Germany is a creditor and invests abroad and in its own banks and companies.
And this gets at the root of the entire problem. Germany exports almost half of its GDP. Germany imposed austerity on the EU after 2008, which has resulted in stratospherically high unemployment rates in southern Europe.
Demand has not returned to pre-financial crisis levels. Germany has been able to skirt the crisis while most of Europe is either still suffering or is in the doldrums. There are limits to US demand and its tolerance of German exports.
All of this offers different unique prisms through which to see how the European Union’s connective tissue is fraying as the bloc’s economic logic becomes increasingly illogical.