We Take Issue with Paul Krugman Over Germany's Role in Europe, Part 1

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Macroeconomics

Some American business folk look at Germany’s industrial policy with a little envy. Germany, it seems, is willing to do just about anything to support its manufacturing industries and the benefits are plain to see. With a vibrant manufacturing sector exporting around the world, it doesn’t get any better than brand Germany when it comes to machine tools, manufacturing equipment, automotive technology, and much else.

At the same time Germany is often looked upon as one of the good guys, respecting intellectual property and international law, while leading Europe out of its mess of debt and incontinent tax collection with fiscal responsibility. But not all would agree.

Paul Krugman, the influential Professor of Economics and International Affairs at Princeton University, is well known for his liberal views on trade and international economics. His view of Germany is somewhat different from the above, as he recent opined in a NY Times article.

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In Krugman’s view, Germany has taken the place of China as the current account running bogeyman of the world economy. For one, Germany has overtaken China as the running the world’s largest current account surplus; both in absolute terms and in terms of a share of GDP, it is twice China’s. That alone Krugman views as bad enough. One country’s surplus is another’s deficit, he says, and he notes that Germany has been running a surplus for a decade, but earlier these were offset by equally massive deficits in many European countries.

Europe as a whole ran a small surplus with the rest of the world. Germany remains dependent on its neighbors, with 69% of total exports going to European countries, including 57% to the member states of the European Union. Of course, not all neighbors are equal. In 2012, Germany ran a trade deficit of €27 billion ($36 billion) with Russia, Libya, and Norway, mainly for energy imports.

Germany also had trade deficits with Japan of €4.7 billion ($6.3 billion) and China €11.7 billion ($15.8 billion). But crucially, Germany had a trade surplus with the Eurozone (France, Italy, Spain, Greece, Portugal, Cyprus, and Ireland) of €54.6 billion ($73.7 billion).

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Austerity (largely at Germany’s insistence) has meant these countries no longer run large deficits. Their deficits have shrunk, but Germany’s surplus hasn’t. In Krugman’s view Germany’s failure to adjust magnified the cost of austerity.

Take for example Spain, the biggest deficit country before the crisis. Krugman says it was inevitable that Spain would face lean years as it learned to live within its means. It was not, however, inevitable that Spanish unemployment would be almost 27%, and youth unemployment almost 57%. Krugman see’s Germany’s surplus as a bad thing, not just for Europe but for the world, helping to keep the world economy depressed. Germany’s growth comes at the price of another’s consumption, not of their own goods but Germany’s, depriving them of domestic investment and employment.

It’s certainly a valid point that Germany has benefitted from the EU and – as paymasters and the largest economy – from how they run it. If Germany had retained the Deutsche mark, they would have the strongest major currency in the world right now. And like the Swiss Franc and Australian Dollar, that would have a counterbalancing effect on the country’s exports and ability to compete.

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Be that as it may, the fact remains Germany is part of the EU and remains the core of the Euro. Weak as that currency is relative to other currencies, it is still much stronger because of Germany than it would be without. What Krugman would have the Germans do is not clear – boost internal consumption surely, allow some higher inflation. The economy has almost flirted with deflation the rate has been so low at times in recent years. But a country’s government is there to look after the best interests of its people and arguably, that is exactly what Germany is doing.

To be continued.

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