There was no economic growth in the European monetary union last year. And, on current evidence, the outlook is for a much worse downturn in the months ahead.

The euro area’s monetary policy cannot help. The core inflation of nearly 4% and unit labor costs of 5.5% offer no room for increasing supplies of cheaper credit flows. The fiscal policy is equally constrained by large public debts and budget deficits in most member countries. That precludes tax cuts or rising government spending to offset the flagging household consumption and business investments.

There is no quick way out of this predicament. A protracted slump will further narrow the possibility of a steady and noninflationary growth in the future.

Based on last year’s productivity and labor force numbers, the euro area’s potential GDP growth has declined to 0.7% -- a sharp downward correction of an official estimate of 1.2%.

With such physical limits to a stable and sustainable economic growth, the euro area is facing serious structural constraints to employment and incomes in the foreseeable future.

Germany’s beggar-thy-neighbor continues

Germany -- by far the euro area’s largest economy – is a case in point. Last year, the economy stagnated and collapsed into a mild recession during the summer and in the final three months.

Remarkably, Berlin’s finance minister acted like he saw nothing coming. Not even a month ago, he denied that Germany was a “sick man of Europe.” No, he said, just a bit tired. And, with a “good cup of coffee,” Germany will continue to “succeed economically.”

But last Tuesday (February 6, 2024) he told an audience in Frankfurt that: “We are no longer competitive … we are getting poorer because we have no growth. We are falling behind.”

Indeed, with its unit labor costs growing 7% last year, Germany is no longer competitive. Its exports fell 2%, after growing 16% in 2022. Despite falling exports, Germany’s trade surplus more than doubled to €209.4 billion because purchases from the rest of the world fell 10%.

That’s Germany’s growth strategy: ride out the recession on the back of trade partners.

Business with the European trading bloc (the E.U.) plays a major role in Germany’s economy. German trade transactions with the E.U. account for more than half of its total foreign trade. Last year, the E.U. generated two-thirds of Germany’s €210 billion in net income on merchandise trade with abroad.

With nearly balanced budget accounts and a public debt of about 60% of GDP, Germany is the only major E.U. country that can afford a meaningful fiscal stimulus to rev up domestic demand and lift the trading bloc’s dismal economic growth of 0.45%.

True to form, Berlin won’t even think of doing that. No, Germany will lecture its major E.U. customers for failure to meet the monetary union’s debt and budget guidelines of 60% and 3% of their GDPs – while continuing to live on their back.

U.S. must strengthen its European alliance

Washington won’t do nothing about that either – in spite of Germany’s systematic and excessive trade surpluses on U.S. trades. Last year, the U.S. gave Germany a net trade income of $80 billion, a 12% increase from 2022.

So, in Washington’s view, Germany can continue its beggar-thy-neighbor trade policies, ignoring the fact that Germans are depressing the E.U.’s economic growth and causing (in 2023) another American trade deficit of $208 billion on its European trading bloc’s business.

As a leading G20 economy, the U.S. is neglecting its duty to promote an orderly international trade adjustment with appropriately coordinated member countries’ economic policies.

Much more important is America’s apparent lack of attention to economic strength and resilience of the trans-Atlantic alliance at a time when it is facing epochal challenges.

The episode of a lighthearted German “cup of coffee” quip is a serious warning. Washington should ponder the meaning of that utter confusion involving the German finance minister and one of the three leaders of the “traffic light” coalition government.

That favorite morning “wake up” beverage was apparently meant as a metaphor for Germany’s much needed structural socioeconomic reforms to upgrade growth of a country that can safely advance at an annual snail speed of only 0.7%. That’s what you get when you add up German growth rates of productivity and labor force.

Germany, and the rest of the E.U., are doing nothing to relax physical limits to growth by increasing the volume and quality of their stock of human and physical capital.

Who, in Washington, is going to heed that message is not clear. And that is not the message for been counters. It’s the highest call of duty for those who are in charge.