Germany and the crisis of the periphery

Originally published on Mar 19th, 2012

Germany has played a major role in every discussion revolving around the current Greek budgetary crisis. Not only has the country been singled out as the biggest creditor, and more generally as Europe’s paymaster, but it has also come under severe criticism for enforcing an export driven economic policy that condemns its European partners to negative trade balances with Berlin. It has been argued repeatedly that Germany is therefore at least partly responsible for the problems faced by the countries on the periphery of the European Union. Germany’s chancellor, Angela Merkel has forced crisis-hit countries like Greece, but also Italy, Spain, Portugal and Ireland, to impose severe budgetary cuts and introduce reforms aimed at economic modernisation and labour market liberalisation. The results have been mixed, with the Irish economy clearly recovering and also Spain, Italy and Portugal disappearing from the headlines (and off the radar of most commentators and analysts, it seems). Greece on the other hand has remained in the spotlight and with the second bailout package agreed upon in Brussels recently, rumours have surfaced that a third package might be necessary (though, maybe wisely nobody has yet spoken of any rescue actions after this) to keep Greece from defaulting.

Germany has throughout the history of the European project been blamed of trying to shape it in its own image, making it a larger copy of itself. In the economic and financial context this would have meant recreating an overtly export oriented Union. There is no doubt that Germany’s economic success is largely due to its exports as domestic consumption has always lagged behind. It is exactly this issue that has triggered repeated statements that Germany’s successes come at the detriment of its European partners. A look at the statistical data provided by Eurostat actually shows a rather interesting development in Germany’s trade balance. The country generally enjoys huge surplus relations with all major western economies, with France and the United Kingdom responsible for almost two-thirds of Germany’s intra-EU trade gains, whereas its eastern trade balance is more balanced, with Poland its biggest surplus partner and the Czech Republic responsible for its biggest trade deficit in the East.

Economic growth “made in Germany”

After a few rather sluggish years, Germany’s economic performance has been very impressive, with a near tripling of its export trade value between 2000 and 2007. At the same time it has generated trade surpluses of 500 per cent outside the EU. Are critics right then, when they claim that Germany’s title as “export world champion” is only possible because its European partners run trade deficits? It would certainly seems so, considering that no other European economy has benefited more from the removal of trade barriers, tariffs and the reduction of exchange rate fluctuations through the introduction of a common currency. All this has made the comparison of prices easier for customers and, combined with the perceived superior quality of goods “Made in Germany”, gives German companies a considerable competitive advantage over their French or British competitors. German auto-mobiles, machinery and pharmaceuticals are among the world’s best and most sought after, explaining its huge trade surpluses.

However, one would assume that European competitors could rival Germany though lower prices for their goods. This though might have been a truism that is no longer valid. German wage moderation in the early 2000s under the Schröder governments, accompanied with huge investments in the modernisation of its major industries, has led to a considerable boost in efficiency, resulting primarily in a) faster and increased production and b) lower production costs per unit. Both factors play a crucial role in ensuring that German products remain competitive and cheap enough to ensure large demand abroad.

Germany’s export orientation, especially within the EU, is not without dangers. In the time between 2007 and 2009, its intra-EU surplus melted from over €125 bn to around €70bn, whereas its extra-EU trade balance remained almost unscathed by the beginning of the financial crisis. Largely responsible for the slump were lower demand in Spain and Italy, where demand for German goods was almost half as much as two years earlier!

Intra-European trade and German demand

What about German intra-EU imports (or arrivals, as the EU jargon has it)? Imports reached an all-time high of almost 520bn Euro in 2008 before dropping sharply in the second half of 2008 and afterwards. The country’s intra-EU imports are by far exceeding the imports of any other EU country. Spanish and French imports combine are almost equal to German imports, thus claiming that the country is not importing enough from its European neighbours seems to be a bit far fetched. Intra-European arrivals are almost twice as high as extra-European imports (mostly Chinese and American goods)! It is difficult to condemn Germany’s decision to import goods from China or Vietnam if those goods are comparable in quality but cheaper than European products. In a globally operating free market, every market player, regardless of the membership in a regional organisation, will pursue a rational and economically sound policy. Besides, most European majors produce in China, not in Europe, and those products of genuine Chinese origin are often not produced in Europe as the old continent has decided to reinvent itself as a service-oriented economy and has thus closed down most of its manufacturing centres.

To demand from Germany to import more from its European neighbours is thus somewhat naïve and populist. The country will continue to be both Europe’s biggest importer and exporter, both in intra- and extra-EU trade, but in order to boost German demand for European goods two factors need to be met: Germany’s domestic consumption needs to pick up; an issue consecutive governments have struggled as German consumer demand remains at satisfactory high but not very high levels with the exception of the holidays, especially Christmas and New Year’s; and its European partners need to offer a portfolio of products, which Germany currently imports elsewhere. Though this might seem like a reasonable proposal, it actually creates new risks, especially if the smaller economies orient their economic output too much in line with current and projected German demand. Any proper diversification of target markets will create the risk of over-dependence and potential economic meltdowns, if demand in Germany would suddenly collapse.

Eurostat: External and intra-EU trade – statistical yearbook (1958-2009)

http://www.epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-GI-10-002/EN/KS-GI-10-002-EN.PDF

Federal Statistical Office of Germany

http://www.destatis.de/

Agenda 2010:

http://en.wikipedia.org/wiki/Agenda_2010

Check the Federal Statistical Office of Germany’s “trade relations compass”:

http://ims.destatis.de/aussenhandel/

Eurostat: External and intra-EU trade – statistical yearbook (1958-2009)

http://www.epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-GI-10-002/EN/KS-GI-10-002-EN.PDF

Germany’s low wages caused euro crisis, says report, January 24, 2012http://mobile.globalpost.com/dispatch/news/regions/europe/germany/120124/germany-s-low-wages-caused-euro-crisis-says-report

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