21 May 2024

Fondation Robert Schuman's Sales: Europe's Decline, a German story?

Since the euro is essentially a political project, the institutional rules that would have reduced current account divergences within the monetary union have not been implemented, as if building up trade surpluses were a virtue in itself.

Chancellor Olaf Scholz's recent visit to Beijing was the subject of much controversy. Since Xi Jinping's nationalist shift, most Western companies have turned their backs on China. Foreign investment is falling, the stock market is plummeting, and the property crisis continues to spread. To compensate for the contraction of its economy, China has decided to turn to the mass production of electric vehicles and batteries, granting large subsidies, at the risk of increasing global imbalances and leading to a crisis of overproduction, to the detriment of European industry and even China itself. However, among the developed countries, only Germany continues to increase its direct investment in China. 

Germany's commitment to economic partnership with China is part of a long-term strategy, dating back to the way Berlin overcame the shock of reunification. Rather than relying on the development of its domestic market, Germany has always favoured a monetary and budgetary policy geared towards the contraction of domestic demand, consumption and investment, so as to generate trade surpluses. This "mercantilist" strategy, which was extended across the entire European market during the "euro area crisis", has been to blame for Europe's stagnation over the last fifteen years. Europeans therefore need to reassess Germany’s strategy and the budgetary and monetary choices that this implies. 

The renaissance of the "German model"

Since the 1990s, Germany's growth has been based essentially on the contraction of domestic demand, i.e. consumption and investment. To deal with the shock of reunification, Germany embarked on a policy known as "austerity", based on the forced dismantling of the economy of the former East Germany (GDR), higher interest rates, wage compression and the overhaul of unemployment benefit rules ("Hartz" reforms) to encourage labour "flexibility".

These deflationary policies took full effect from the 2000s onwards. German companies benefited from the American recovery and the opening up of China following its accession to the World Trade Organisation (WTO) in December 2001. China has become a leading export market for cars, chemicals and machine tools, which have allowed Beijing to modernise its productive capital and its army. This surge in exports has primarily benefited the major industrial conglomerates (BASF, Siemens, Volkswagen, Mercedes, ThyssenKrupp, etc.), but also the small and medium-sized enterprises of the "Mittelstand", whose orientation towards exports has been financed by the network of Sparkassen. 

Over the years, Germany's trade surplus rose sharply, becoming the largest in the world on the eve of the "euro area crisis". This was not due to the otherwise indisputable quality (Deutsche Qualität) of 'made in Germany', but essentially to the fact that German imports had grown much more slowly than exports. The focus of the production system on 'competitiveness' has led to wage stagnation in a market also characterised by a sharp rise in low-paid, insecure jobs. Over the period, German companies have recorded a sharp increase in their financial surpluses, while public and private investment have fallen. 

This phenomenon was accentuated by the fact that Germany, emerging from the shock of reunification, entered the euro zone with a favourable exchange rate compared with that of its European partners, mainly France and Italy, which had imposed high interest rates during the previous period of convergence to the detriment of their productive capital and, in the case of Italy in particular, an increase in public debt. The advent of the single currency then meant that Germany was able to build up a considerable current account surplus without suffering the appreciation of its national currency, as was the case in previous decades when Germany and France jointly "revalued" the Deutsche Mark against the Franc. 

Since the euro is essentially a political project, the institutional rules that would have reduced current account divergences within the monetary union have not been implemented, as if building up trade surpluses were a virtue in itself. Germany has thus been able to grow its current account with impunity, benefiting from buoyant consumer spending in France and the countries around the Mediterranean. Since it has maintained a situation of under-investment and reinvested its savings outside the euro area, mainly in the form of purchases of US securities (notably the sadly-titled "subprimes") or direct investments in China, Germany has therefore functioned for years as a mercantilist state that has not reinvested its surpluses.

The European elites, particularly the French, failed to perceive the imbalances and risks inherent in the economic strategy pursued by Berlin. On the contrary, economic research institutes and business circles widely promoted the "German model", paving the way for the deflationary policies that were to be pursued during the "euro area crisis".  The virtuous image of "Rhenish capitalism" was constantly put forward to demonstrate the effectiveness of "supply-side" policies based on cutting wage costs and reducing public investment. Germany's growth has mainly been linked to high consumption and investment in the other euro area countries, particularly France and the countries around the Mediterranean (whose economies were catching up as a result of joining the single currency); however, Germany's current account surplus was seen as a sign of "good health" that it owed solely to "its efforts". In reality, it was the German 'ant' that was living off the European 'cicada', and the euro area countries that were soon to be reprimanded for the management of their finances could legitimately have asked Germany to account for surpluses that it owed solely to the dynamism of domestic demand in the other euro area members and that it reinvested outside Europe. Emmanuel Macron, Christine Lagarde (then Managing Director of the IMF) and others tried their hand at this for a while when it came to learning the lessons of the "euro area crisis", but without any real success. The Managing Director of the IMF has repeatedly stressed the need for Germany to "consume and invest more" to reduce "global imbalances", particularly in public infrastructure and digital technology. Similarly, the President of the French Republic has urged Berlin to overcome its perpetual "obsession" with budget and trade surpluses, "because they are achieved at the expense of others", he added....

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