A few months ago, I wrote an article under the title ‘Europe Needs an Hegemonic Germany’. Handelsblatt, the respected German daily, has now picked it up and published it on 24th July 2013. (Many thanks are due to Stephen Richter, of The Globalist, for his copy-editing and support. And for posting a version of this article here.) Click here for a pdf of the relevant Handelsblatt page, or read on for my original English language text…
Back in the 1940s, after the calamitous, German-driven events of the Second World War, the key players in Washington’s corridors of power spent sleepless nights fretting over a terrifying prospect.
They could easily envision another pseudo-recovery – a glut of sparkling, technologically innovative products that the United States of America could be producing. Trouble was, the rest of the world, bled to near-death by war, was not able to afford it.
It was this concern of a fresh depression that, along with the Soviet threat lurking behind the iron curtain, energized Washington’s policy makers to implement a plan that spawned capitalism’s golden age.
Theirs was a global plan that did not just encompass Bretton Woods and the Marshall Plan. There was also a concerted campaign primarily designed to help the Germans get out of their peculiar pickle.
Based on the Versailles precedent, but this time without any question of its war culpability, Germany faced a predicament that bade very poorly for any prospects of their recovering, whether economically, politically, socially, culturally.
The package of measures driven forward by Washington included firm steps to:
- Write off Germany’s wartime debts
- Spare Germany of the de-industrialization that France and Britain were bent on enforcing upon it
- Cajole the Europeans to move in the direction of a common market
- Even create the circumstances for the Japanese industrial miracle to take off, even if this meant opening up U.S. borders to Japanese imports with detrimental effects on venerable American corporations.
In short, after the war, the United States accepted the challenge of putting its own surpluses at the disposal of a global economy. That meant first and foremost to generate the aggregate demand required to get all the war-torn economies going again.
To ensure the success of this most strategic mission – post-war recovery and a reinfusion of hope, purpose and optimism – the United States carefully monitored, managed and calibrated global demand so as to minimize the likelihood of another Great Depression.
That formula worked spectacularly for a long while. Over the long course of that medication and recovery campaign, the patient(s), whether Germany or Japan, forgot that they were indeed not principals – but patients being systematically nursed back to health.
When the United States of America lost its surpluses toward the end of the 1960s, and the Bretton Woods system collapsed soon after, a new phase followed. During that period, the United States, with its burgeoning deficits, stepped into a new role as global demand manager.
In order to keep generating most of that demand on which the global economy ran, it took over the role of recycling global surpluses (even if it was other peoples’ surpluses, no longer American ones, that were now being recycled!).
The United States acted, in fact, as a gigantic vacuum cleaner, sucking the net exports of Germany, Japan and, later, China into its territory.
Because of America’s readiness to do so, all that those industrious Germans, diligent Japanese and punctilious Chinese had to worry about was the desirability and cost of their products. The demand was perhaps not God-given – but it was certainly America-given.
Then, of course, the crash of 2008 happened – and this event changed everything.
When Lehman Brothers disappeared from the map, and Wall Street entered into a tailspin, it was not just the pyramids of toxic derivatives that disintegrated.
Arguably, the most significant victim of the crash was the ability of the U.S. economy to ‘close the global loop.’ It was no longer able to continue recycling the world’s surpluses in the same manner.
Until 2008, America’s recycling had worked its magic. On the one hand, it provided the demand which the globe’s key net exporters needed. And on the other hand, it kept regenerating America’s economic vitality, rendering its increasing deficits ever more precarious, but sustainable, which was key.
Now, we live in a very different world. Put simply, even though the U.S. trade deficit has now ‘recovered’ to almost its pre-crash levels, and the U.S. budget deficit has hit new highs, America’s deficits are no longer capable of maintaining the mechanism that kept the global flows of goods and profits balanced at a planetary level.
In this post-2008 world, the United States is sucking in 24% fewer net imports from the rest of the world. It also attracts 57% less capital into its private sector compared to what would have been the case had Wall Street not collapsed in 2008.
Which brings me to my argument: Having been pampered for six decades by a United States which, through thick and thin, generated the global demand that allowed its exporters to worry solely about the desirability of their wares, Germany’s, Japan’s, China’s and South Korea’s elites are now finding it conceptually impossible to come to terms with the new ‘normal.’
We now live in a world in which:
- sufficient aggregate demand can no longer be maintained, not by the United States nor by any one single bloc
- the big exporters can no longer afford to take for granted the global demand for their goods
- there is no room for a eurozone that operates like an augmented Germany.
Germany’s economic strategy which, in my view, overemphasizes deficit reduction and plays down the ever more powerful recessionary headwinds, is a sorry and dangerous leftover of a long-gone world order built by America.
Europe’s dominant economy and its economic strategy for the continent and the world economy is stuck in a rut because it has relied for way too long on the United States acting as an over-protective parent.
It is time that Washington has a word with its former ward and lets it into the terrible secret: the Europeans now live in an unforgiving world, a world in which Europe’s policies must actively manufacture (in cooperation with the United States, China and the other BRICs) the effective demand on which our shared prosperity depends.
When Wall Street imploded in 2008, the U.S. Federal Reserve was presided over by a gentleman who had fortunately spent a good part of his younger years studying the effects of the Great Depression.
Europe’s elites instead entrusted their central bank, the ECB, to a seasoned financial bureaucrat who had also gained experience in mainstream banking.
Could this explain why Europe is so stubbornly pursuing an austerity-driven road to stagnation? Can’t the Europeans see how dangerous it is to keep fuelling the mutual reinforcement process linking austerity, debt and negative growth?
The key to answering this question lies, I suggest, on the other side of the Atlantic — in the United States. It is here that the roots of Europe’s radical complacency are to be found.
To be sure, Europe has had its fair share of economic calamities and depressions. But it is mainly the United States of America which has learned a bitter lesson from the Great Depression.
That lesson is simple. However desirable an economy’s manufactures may be, whatever the technological sophistication of its products and regardless of the cost efficiency of its industry in manufacturing them, there exists no guarantee of sufficient demand for them.
Chairman Bernanke’s Ph.D. thesis was thankfully all about the set of circumstances that can entrap a highly efficient industrial economy into a bad equilibrium from which the entire world cannot escape by the conventional means — either by reducing prices or by innovating further.
No amount of obsessing about hyper-inflation and run-away prices will ever help the Germans to come close to the essence of the world’s most important economic lesson. It’s demand, stupid!
And creating that demand is not the perverse drive of some consumption-hungry American consumers. It is the elixir on which the global economy – and, yes, civilization itself is running.
That’s a hard fact that, in the end, even the philosophically minded Germans can’t dispute. For if they did so in earnest, they would shortchange themselves.