What Can the U.S. Expect from a Quest for Stronger German Ties?

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

Washington’s recent efforts to restore and invigorate close relations with Germany are an important part of a new architecture of Western world order.

Accounting for one-fourth of the EU economy, and for nearly a third of the trans-Atlantic trade flows, Germany is an economic powerhouse that sets the pace to demand, output and employment in more than two-thirds of the industrialized world (OECD) economies.

Those numbers show that a close U.S.-German partnership could serve as a foundation for an integrated system of U.S.-led democratic alliances, with free flows of commerce and finance in the rules-based multilateral trading regime.

That, however, is a tough agenda. Here is a number of key issues to consider.

To serve as a European pillar of such a system, Germany would have to implement important adjustments to its economic management. Germany simply cannot aspire to a position of economic and political leadership by continuing to live off its American and European trade partners.

Since the end of the acute period of the financial crisis in 2012, Germany’s trade surpluses have remained in the range of 7% to 9% of its GDP. Almost 70% of German exports go to the rest of the EU, and half of its trade surplus is generated within the European single market.

Germany cannot be the EU leader

Berlin’s trade problems with the U.S. are equally worrying. In the first five months of this year, Germany’s surplus on its U.S. trades was running at an annual rate of $68 billion, an increase of nearly 30% from the same period of last year. Germany’s systematic, growing and excessive trade surpluses with the U.S. have been one of the major irritants with the previous administration.

Why is that such a big issue?

Germany’s “beggar-thy-neighbor” trade policies are stifling the economic growth within a trading block that takes 25% of U.S. exports and accounts for 30% of the OECD economy.

This is an old story neglected, ignored and glossed over until the Trump officials began raising the issue. They got nowhere. And, sadly, with the help of hostile and uninformed media, they got covered with opprobrium, hate and accusations of destroying an already moribund trans-Atlantic community.

Europeans, for their part, are too weak – or literally scared – to take Germany to task on this eminently legitimate issue of intra-EU economic mismanagement.

So, Germany gets a free pass, usurps a moral high ground as the EU’s lecturer-in-chief on monetary and fiscal virtues and laughs all the way to the bank with its soaring trade surpluses, low unemployment and a middling export-led growth.

Nobody will change that. But what kind of change is needed?

The irony is that the change needed in the composition of German economic growth is at the core of the G20 mission of international economic policy coordination. The G20 is the world’s main economic forum where policy recommendations are supposed to produce a balanced global economic growth by eliminating systematic and excessive disequilibria in member countries’ external accounts.

The OECD and the IMF are the world’s other two official economic forums where the G20 objectives can be implemented by inviting large surplus runners to respect the rules of international trade adjustments. That should be part of their annual examinations of member countries’ economic policies.

Seek a better deal with Moscow and Beijing

In the case of Germany, that would simply mean a realignment of fiscal and trade policies to generate more growth from domestic demand (household consumption, residential investments, business capital outlays and public sector spending) rather than boosting export sales.

And the result would be very much different than this appalling outcome: For this year, foreigners will finance (through Germany’s trade surplus) 2 percentage points of an estimated 3.3% economic growth.

Washington will turn a blind eye to all that, hoping that a quid pro quo will be Germany’s push to get the EU behind the U.S. policy of confronting Russia and China as strategic and systemic adversaries.

Germany, of course, cannot and will not deliver that.

At stake are $120 billion of German annual exports to China, and the future of German automobile industry, the backbone of the country’s economy. Russia is by far Germany’s (and EU’s) most important energy supplier, a large customer for a wide range of EU industries and a key partner for any credible and sustainable security agreements.

That is already quite clear. Led by Germany and France, the EU’s recent top level contacts with Russia and China indicate that Washington’s hard confrontational line will not be followed.

For Paris and Berlin, business will come first, with a lip service paid to different social systems, traditions and values – while Moscow and Beijing continue to firmly stand by their red lines and a steadfast determination to block any foreign interference in their domestic affairs.

All that means that instead of chasing a mirage of trans-Atlantic unity, Washington would be much better off by deploying a more sophisticated diplomacy with Moscow and Beijing.

Guess who desperately tried to do that.