|Speaking at the annual conference of the Federation of German Industries (BDI) on June 15, 2009, Chancellor Angela Merkel observed that the current crisis is a classic export crisis. She said that due to reforms in recent years, competitiveness had been restored and Germany went into the crisis from a position of relative strength.|
According to the Chancellor, there was no alternative to orientating the country towards being an export nation: "Otherwise we would be putting our prosperity at stake.” As a country highly dependent on exports, she said there was an "innate interest in combating the causes of the crisis.”
Germany - - the world’s biggest exporter - - has been the focus of criticism in recent times because of its reliance on exports and it has been advised to switch to boosting domestic consumer demand. Martin Wolf, chief economics commentator of the Financial Times, wrote last month: Why has the European Union suffered so badly in a crisis that began in the US? He said the answer is to be found in four weaknesses: first, Germany, the EU’s biggest economy, is heavily dependent on foreign spending; second, several western European economies are suffering from post-bubble collapses in demand; third, parts of central and eastern Europe are also being forced to cut spending; and, fourth, European banks proved vulnerable to both the US crisis and to difficulties nearer home. Given these realities, recovery is likely to be slow and painful.
According to the latest consensus forecasts, the EU economy is expected to contract by 3.6 per cent this year and the eurozone’s by 3.7 per cent, while the US is forecast to shrink by only 2.9 per cent. Thus the crisis punishes the frugal more than the profligate. It seems so unfair. It is not: the frugal depend on the profligate, he said.
Martin Wolf said a remark in the European Commission’s spring forecast gets to the nub of the problem: “As exports are usually the first component to recover in the eurozone business cycle,” it argues, “the export outlook is key.” The eurozone is the world’s second largest economy. Why should it depend for recovery on external demand? Wolf asked. The answer lies with Germany, he said. The Commission forecasts that the fall in net exports will account for three-fifths of its 5.4 per cent economic shrinkage this year.
In a recent article in Welt am Sonntag, Prof. Norbert Walter, chief economist of Deutsche Bank, wrote that the purpose of economic activity is certainly not exporting. Consumption is closer to the truth. But even closer is the sustainable augmentation of prosperity. What prosperity is, and what makes its augmentation sustainable, however, is open to debate, he said. Some people think that prosperity is all about personal consumption and specifically our current consumption.
Walter says there are, however, good reasons for choosing a broader definition of prosperity - - namely to also include providing for society and thinking about more than just the here and now. Answers to the question of how to maximise prosperity in this more comprehensive sense need to be founded on behavioural maxims and regulation. He wrote: What do we Germans have to do in order to come as close as possible to achieving this complex, but meaningful objective? Is it time to scale back the strong focus on satisfying the interests of global clients? Does this mean that instead of promoting exports, Germany should concentrate on satisfying (immediate) consumer’s interests?
Prof. Walter said the latter is essentially what the Nobel laureates Krugman and Stiglitz recommend, as do some German economists - - for example, the member of the German Council of Economic Experts, Peter Bofinger, or economic policy specialists from the parties on the left of the political spectrum. Along this line come the calls for German wages to be raised in order to bolster the purchasing power of working people and thereby to boost consumer demand. This would be a way of reducing Germany’s huge trade surpluses, so the argument goes. And at the same time this would provide the notorious deficit countries - - such as Spain or the US - - with an opportunity to reduce their unsustainable current account deficits.
Aren’t these propositions very plausible? he asks. "Isn’t it enticing to link the pleasure we Germans gain from consumption with solving the problems of our ailing partner countries? So shouldn’t we thank those who submitted the proposals and start making the corresponding therapeutic adjustments?! Or is there a snag somewhere after all? Might the whispering advisors have forgotten something important?," he says.
First of all, Prof. Walter considers the facts: the export boom has been over since last summer, with exports falling not simply just a little, but in truly dramatic fashion. In April 2009 they were down nearly 30% year on year. Especially, after the Germans became used to double-digit growth rates virtually every year. Such a decline has the hallmarks of a crash. What does it tell us? Are those lost who rely on exports? So are Krugman and Bofinger right in saying that Germany has to rely more on domestic demand?
He says no, because this simple arithmetic is wrong, and wildly so. Germany would be well-advised to deploy its strengths where its markets are. The country cannot sell either all its cars, airplanes, pills, CAT scanners or its trucks in the domestic market. The volumes required for effective production can only be achieved if the whole world is viewed, as the market, by such German producers. Walter also says Germany has something to offer the world not only in these traditional areas, but also in aircraft maintenance, as a provider of technical services to the world, in scientific and musicology training, winegrowing, hotel management, logistics organisation, facility management, energy efficiency, refuse disposal, toll systems, renewable energies and computer games. And finally Germany also has tourist attractions in its castles and cathedrals. He asks how can one possess all these jewels without wanting to share them with customers from all over the world and doing business at the same time? Does this contradict an attitude focused on looking after one’s own interests and which thereby helps partner countries to solve their own problems?
By no means! However, he says Germany doesn’t need to accept the short-sighted remedies proffered by Harvard economists and the advocates of the purchasing power theory of wages. There are more sensible options, but above all ones that are more sustainable. Since Germans - - like other societies - - will soon experience the long-term ageing of our population, the economy is structurally on track to import more than it produces and exports. Thus, Germany's problem is not so much one of too little consumption at present, but rather of reliably financing consumption in future, when pensioners are in abundance and there is a shortage of labour (i.e. for at least two decades after 2015).
Prof. Walter says in order to create a cushion for that period, Germany should continue to generate current account surpluses and use the corresponding savings now to specifically finance infrastructure investments in emerging markets and developing countries, so that the recipient countries become more productive. They can then help Germany to finance its import surplus from 2015 onwards via dividend payments on these high-yielding investments. Germans should not indulge in overconsumption now and then have to endure poverty in old age. He says it would be really good if gifted US economists were to recognise the ageing of Japan and some continental European nations for what it is: a reason to ensure sustainable consumption capability after 2015, by producing abundantly for the world now, accumulating savings and investing them productively in the world’s rapidly and dynamically expanding countries. This is the productive interpretation of the opportunities for expanding prosperity via globalisation.
Walter concludes: "It would be good if economists from the superpower were to grasp this logic of the free market system! So, good luck to the world’s leading exporter! Don’t let up: we Germans have something to offer the world, and we won’t be a burden on the world with our productive vitality!"
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