Die deutsche Frage redux

Another answer to the German question: Would it kill us to put away our wallets, listen, and learn something useful for a change? 

Recently, we asked our readers to ask us anything. We’ve got even more to say in response.

By Adam Garfinkle

The question, exactly as received:

How should the US deal with Germany? The Germans did a great deal of economic damage to the US. (and even more to the EU) in the 2010s; they seem to lack knowledge of basic economics (e.g., countries with trade surpluses should not run large fiscal surpluses; if you punish bankrupt countries they will go even more bankrupt; etc.). How do we prevent this from happening again? What kind of pressure would best work against the German government?1

Actually, there are three questions here, interrupted by a comment. The questions can only be answered in the context of an evaluation of the embedded premises. The first, very general, question would merit a very different answer were it to stand alone, so we must understand the package as essentially a single question—even though it isn’t—framed around a single theme.

In truth, this is a devilishly complex subject. Aside from being unsimple, the question is also emotionally charged, and it contains accusations that suggest a framework for answering it. So the answer is apt to depend who is doing the answering.

If you ask these questions of an intelligent German, they are apt to be taken as an arrogant, ignorant, and probably deliberate affront. Why? Because the tenor of the US-German bilateral relationship in recent years has made it so. Ex-President Trump was and remains a zero-sum-fixated person who has never been able to wrap his “big brain” around mutually beneficial relationships at any level, and certainly not around relationships that have been long institutionalized and made routine, such as treaty-ratified alliances.

During his tenure, the President sent to Berlin an Ambassador of perfect fidelity, in this regard: Richard Grenell. During a meeting with him in his office at the US Embassy in Berlin, in the summer of 2018, I got a direct earful of the sort of thing he was telling Germans. The insinuations of the question at hand came near the top of his list of complaints, in keeping with a United States Government that, at the highest level, now thought and acted like a transactional neo-mercantilist in foreign policy (which, given its circumstances, it did not need to do, and should not have been doing) speaking to an allied government that was also pursuing a transactional, neo-mercantilist foreign policy (but whose situation, developed over many years, gave it little attractive alternative).

I don’t assume that our questioner is a fan of Donald Trump or Richard Grenell. If he is a fan, then I have better things to do than try to explain reality to a willful nitwit. I assume the perspective embedded in the question is more general; it is, after all, a point of view one sees in The Wall Street Journal and the letters’ columns in The Economist and the Financial Times. In other words, the questioner does not necessarily disparage Article V of the NATO Treaty or, like the last US Administration, exude a wish that Germany were not an ally of the United States. I proceed based on that hopeful premise.

Did “the Germans”—presumably the questioner means the democratically elected officials of the German government, not the German nation of some 83 million persons—really cause economic damage to the United States in the 2010s? To imagine so confuses sequence and causality. The Euro crisis was caused by the collapse of the US housing market in 2007-08, which was caused by regulatory illiteracy, in turn caused, in part, by the financialization and plutocratic transformation of the American economy. At least in the early part of the decade, the US did far more economic damage to Europe and Germany than the other way around.

Once the Euro crisis hit third gear, German decisionmakers, as leaders of the largest economy in the EU, faced the imperative of rescuing the European Union and its currency union in the absence of a political and fiscal union and thus any central authority for decision-making. The German government, powerful as it is, does not control the decisions of the European Central Bank. If you think it’s easy to put a new roof on a building without a hammer, nails, and tar, try it yourself sometime.

A critical historical note: Between 1990 and 1992, German leaders warned against establishing a currency union prematurely and in the absence of a unified EU fiscal policy. The US Treasury Department and Fed officials tendered some advice to the EU, too. But the French insisted on the currency union as the price of their support for reunification, believing that in this fashion they would revive the old Gaullist dream: France would be the rider, Germany the horse that would pull Europe to prosperity and glory. At the time, hammering out a European consensus for enabling German reunification loomed much larger than mere economics. So the Germans said, “Okay.” In the next half-dozen odd years, before the currency union sprung into being in 1999, they tried to ameliorate what they knew would eventually be problematic. Half inadvertently and half inevitably, the Germans turned the Euro-to-be into the Deutschmark, in effect—which was better for everyone than turning it into the Franc or the Lira, but not better equally so.

I repeat this to make it plain as possible: German authorities opposed a premature currency union, then got stuck as economic primus inter pares with the responsibility—but not the tools—for handling a crisis catalyzed by US economic malpractice.

Did German policy harm other EU countries, then? That, too, is complicated. The questioner asserts, “Countries with trade surpluses should not run large fiscal surpluses.” It’s true that trade imbalances will worsen if countries flush with money don’t spend it somewhere; and those imbalances, if large and persistent enough, may cause some bad feeling. But it’s not true that trade imbalances are caused solely by not spending surpluses, and it’s not true that national leaderships typically feel a particular obligation to build up employment statistics in other countries—nor is it true that this is the primary determinant, or a significant one, of employment in a country with a giant domestic market, like the United States. Persistent US trade deficits, for example, owe much to the fact that the dollar is the global reserve currency. But this brings compensatory benefits. Moreover, at least in recent years, many German surpluses were held by Länder governments. Berlin can’t readily order them do what they don’t want to do. This is how the German federal system works, which Americans should—but often do not—appreciate.

Germany did bail out Greece and a few other countries, albeit not lavishly and with conditions. But doing more than that, aside from creating moral hazard, might have triggered an inflationary spiral, harming Germany’s export-oriented position in the EU and the wider world. Germans are very sensitive, for historical reasons, to runaway inflation. (Nor is it foolish to avoid debauching your currency—word either to the wise or the oblivious, as the case may be.) Here we return to Germany’s neo-mercantilist orientation, which is clearly a product of history and culture.

Yes, Germany and much of Northern Europe do march to their own drummers. This has cultural roots. They are frugal, disparage deficit spending, and have so far mostly avoided falling prey to the short-term, “flip-it” mentality that has taken deep root in the United States, thanks in part to the deranged subcultures of prestigious business schools.

More than that, however, Germany has proved successful. It has strived over many years to climb the ladder of added value, in human capital and technology, and it has succeeded. It is churlish to accuse an ally of doing you damage because it has succeeded through wise investments and you have not. Compared to the self-inflicted damage US policies have done to the American economy—massive under-investments in science, infrastructure and education, for example, and too many meliorative schemes creating disincentives to work—Germany did not a fraction of that damage to the US economy by outcompeting it, unless you count injury to ego or the MAGA cult worldview as damage.

So Germany, says the questioner, is ignorant of basic economics? Then how does the questioner explain Germany’s economic success? Must be their strong-armed beggar-thy-neighbor policies, right? Could it be, instead, that the Germans show a strange propensity not to risk their own well being by adopting the short-termism and profligacy of others? Twenty years ago, the Federal Republic was the economic Sick man of Europe, consumed with financing the debts incurred to integrate the GDR. Now, the Germans are seen as rigid, egotistical, and bound to an economic theory others reject—but which has has brought Germany more stability and prosperity, both absolutely and per capita, than any other Western nation, including the United States. 

Nations will compete, and beggar-thy-neighbor accusations can be excuses for being out-competed. But it’s complicated. One reason Germans have become neo-mercantilist in orientation—sometimes stupidly and narrowly so, as with energy pipeline politics in recent years—is because no one, and certainly not Germans themselves, wants German competitive impulses expressed in Realpolitik, let alone Machtpolitik. That Germans don’t want to compete that way has a relevant history, too.

Germany could not have succeeded as it has over the years without the markets, general stability, and defense assets provided by others, especially the United States. The side effect of deliberately swaddling Germany in NATO and European institutions was infantilizing Germany’s strategic culture and traditions, but in most everyone’s view, for a damned good reason.

It’s also true that the EU, especially since the 1999 currency union, creates a kind of controlled environment where the strong can take easier advantage of the weak just by going about their business with a mind to making money. You don’t have to have a predatory mentality to succeed in business if your competitors, even those with predatory mentalities, just aren’t as good at what they do as you are.

There is little constraint against normal business competition within the EU; it is a market system despite its regulatory metabolism. So the poorer countries with cheaper labor—mostly new EU entrants in central and eastern Europe—will be used as production platforms. This is ultimately to the advantage of both parties, but rarely equally. Returns to capital will always be higher than returns to labor in a dynamic technological environment.

It’s a little like the American debate about sweatshops in the developing world. Do big Western companies exploit labor in, say, Bangladesh to make textiles and shoes? Yes, and by doing so, they undermine trade unions in the United States and depress blue-collar wages. That doesn’t hurt the US economy as whole, looking at aggregate numbers, but it does hurt real people all the same, not a few of whom articulated their displeasure by voting for Donald Trump in 2016. Meanwhile, do the Bangladeshis who owe their jobs and incomes to foreign direct investment go out of their way to complain about it? Not often, because to date, their alternatives have been non-existent. Result: the US Gini coefficient gets worse, but the world’s aggregate Gini coefficient gets better. How do you parse that, morally? Ain’t easy. Same goes for German investments and Hungarian, Polish, and Romanian laborers.

But the putative beggar-thy-neighbor problem, whatever its origins and nature, doesn’t originate in Germany. It’s the EU that’s a mess, as a kind of halfway house between political aspiration and economic incoherence. German officials, strong as their economy may be, can’t just wave their arms and fix what more than twenty other still-sovereign states refuse to agree to fix. And now that halfway house, having endured poorly the stresses of recent years, is in worse shape than ever. For lack of will and design, it can’t go forward. It dares not go back to wholly nationalized economies, given the demographic pressures within and external pressures without, from many quarters, that threaten once again to tear European societies and countries apart.

German leaders understand this. They do not plan to lower Germany’s economy to the level of Italy’s and invite populist political instability, what with the AfD fulminating and organizing in the wings, just to win an EU popularity contest. Germans can be stunningly tactless, true, but that’s not mainly what’s going on here. What’s going on is that Germany gets criticized for its success and blamed for prioritizing its own long-term interests, as its leaders see them, even when trusting to the success of the larger European commons, embodied in the EU, would clearly be a highly questionable judgment.

When asked questions like these, Germans often stew in silence rather than argue back. Why? Because we all know what happens when Germans try to badger and lecture others about what is in their own best interest. This is also why Germans react as they do when American officials complain about laggard German defense spending and Germany’s lack of a single combat-ready division. Can we please for once be honest about this? Of course the Germans have the money and the know-how to contribute more to their own defense, but what would the political consequences be in Europe if they did so even though their neighbors mostly can’t and won’t? We all know the answer, so can we please knock off the pretense?

So, finally, how to put pressure on the German government? How about some economic sanctions, maybe? Other nations are invariably endeared to those who violate their sovereignty despite claiming when it is convenient to be their ally. Sorry for the sarcasm, but seriously, why not once again try treating Germany like the important ally it is?

Germany is the US’s third most important trading partner after Canada and China, and through investments in the United States, it has created nearly one million jobs here. Together, we ended the Cold War and liberated millions of people from communism, after which we took in the needy wards of the collapsed Warsaw Pact and honestly tried to help them, for their own sake and in our enlightened self-interest. Germany is not our enemy, not even remotely. Indeed, I would dare venture that its policies have helped keep things more rather than less stable, in Europe and beyond, in the face of a series of questionably competent US administrations in the strategic sphere since the end of the Cold War.

Rather than put pressure on Germany, we might consider sitting together with its leaders, and those of other allies, to think through our common challenges. In the wake of the Trumpist perfectly-awful storm, we have that chance anew. The old American-made postwar order is all but gone—a victim of its own success, generational churn, and domestic institutional decay. The major challenge that we, the Germans, and other Western nations face now is not China, not climate change, not a pandemic’s aftermath, nothing of the sort. It is fundamental upheaval within our own societies, whose causes we refuse to understand and whose transformative potential we refuse to acknowledge.

In the period ahead, three attributes will be critical to national success: human capital, social trust, and institutional coherence, both within public and private organizations and among them. Germany scores high in all of these categories. The United States used to, and must do so again. Would it kill us to put away our wallets, listen, and learn something useful from others for a change? 

Adam Garfinkle, a historian and political scientist, is an editorial board member of American Purpose magazine.

From Claire—I couldn’t agree more, Adam. Seriously.

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The reader, Joe Eager, subsequently clarified this question in response to Jon Nighswander’s reply. He wrote,

Thanks for your reply on Germany. I didn't mean to imply the Germans hurt us on purpose, sorry about that. Global demand is fungible, and slow demand growth in the eurozone was a drag on our exports.

I once read an FOMC transcript (I think it was from 2012) where a Fed delegation to Germany reported back on their lack of success in convincing the Germans to coordinate policy. The delegation officials were surprised at how economically illiterate Schauble and his ministry were.

The EU is an enormous economy—what happens there matters for US growth and prosperity, not just in terms of economics but politically as well. Political instability in Europe can and does spill over into US politics.