It hasn't been a good couple of weeks for Berlin and Washington.
Close allies since the post-World War II era, those fuzzy feelings have iced over – and it's not just because the NSA has been secretly tapping Angela Merkel's cell phone.
Germany and the United States are in a very public spat over Germany's economic strategy. A U.S. Treasury report, released Oct. 30, boldly criticized Germany for maintaining a large current account surplus through the financial crisis, thereby creating a "deflationary bias for the euro area, as well as for the world economy."
The Treasury claims that Germany's tiny domestic demand has created huge imbalances in Europe, while other countries (read: Greece, Spain) have been forced into harsh austerity measures to stay afloat. The Treasury also accuses Germany of delaying the euro area's "external adjustment process," dragging down its peripheral neighbors and keeping them in a recessionary chokehold.
German officials fired back, calling U.S. criticism "incomprehensible."
"The trade surpluses reflect the strong competitiveness of the German economy and the international demand for quality products from Germany," the German Economists Ministry said in a statement Oct. 31.
The Treasury usually targets China for its economic complaints; antagonising Germany is a blunt shift from the traditionally amiable friendship between the administrations of Obama and Merkel.
But the Americans have a point. Germany's surplus shot up to $238.5-billion (U.S.) in 2012, surpassing China's $193.1-billion, according to World Bank data. It might seem strange to complain that Germany has been too responsible in its spending, especially as the U.S. struggles with astronomical debt.
Discipline and restraint are ingrained in German culture. German household savings rates are expected at 10.3 per cent for 2013, according to the OECD. By contrast, gluttonous American households will save just 2.4 per cent of household income, and Canadians are just slightly better at 4.4 per cent.
"Germans are insecure about the future. They see what is happening in other countries, and think saving is a safe thing to do," explained Dr. Stormy-Annika Mildner, international trade expert at the German Institute for International and Security Affairs, a policy think-tank.
But economically, the German savings glut has been damaging. While the rest of the G7 shows tangible signs of recovery, the euro zone is still ailing, with crippling unemployment and stagnant growth. And the reason is simple: there is no demand. Pre-recession, southern European countries ran large deficits, counterbalancing Germany's surpluses. But after 2008, the debt-ridden PIIGs were forced (by Germany) to cut back spending to qualify for bailouts.
To maintain the balance, someone else would have had to step in and ramp up consumption in order to compensate for the shrinkage in demand from the rest of Europe. But Germany didn't budge. And so the continent is now running a big trade surplus, in classic beggar-thy-neighbour fashion.
Current account balances
in billions of euros
SOURCE: Anna Nicolaou/Bloomberg
Worse yet, German exports have remained strong throughout the euro crisis. That’s certainly a reflection of German goods’ deserved reputation for high quality, but also Germany’s not-so-secret weapon: the euro.
While other wealthy countries, such as Japan and Switzerland, are spending billions of dollars trying to depress their currencies, Germany has glided along on the weak euro, allowing exporters to price their goods far cheaper than they would have on the deutsche mark. Germany has a responsibility to the euro zone, and is shooting Spain and Greece in the foot by ignoring it.
“German companies benefit from a euro that is undervalued, but that’s not Germany’s fault,” Dr. Mildner argued. “[It’s a result of] structural deficits in other EU countries and the lack of a fiscal union in the euro zone.”
The NSA-scandal makes this a particularly bad time for the U.S. to lodge this complaint, especially with the EU-U.S. free trade talks looming next month.
“Within the industry and institutions in Berlin, the reaction was: Do you have to say that right now?” said Dr. Mildner. “The skin is getting thinner on this side of the Atlantic.”
However, she didn’t expect Germany to let the quarrel interrupt the trade negotiations. “The government really wants this deal. There is so much to gain for Germany….they know that putting a freeze to negotiations would hurt them more than anybody else.”