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You’re Big, Germany. Now Act Like It.

You’re Big, Germany. Now Act Like It.

(Bloomberg Opinion) -- Germany’s best friends in Europe, the Dutch, are becoming concerned that Europe’s most important country has adopted a small-country mentality. They’re right.

In an address this month at Berlin’s Humboldt University, Dutch Finance Minister Wopke Hoekstra accused Germany of wanting to be “like Switzerland: you stay on the sidelines, and you get to live happily ever after.”

The European Union has a problem when its biggest country and natural leader thinks and acts like a small country, preoccupied with its own concerns and indifferent to the consequences of its policies on the others.

Only a small country, for example, can legitimately argue that running a large budget surplus is nobody’s business but its own.

Germany is a big country, and its huge budget surplus is affecting its partners in a variety of negative ways. It keeps domestic demand down to promote low wages and low prices. This makes German exports super-competitive on world markets, boosting German exports.

Because Germany is so big, this export-led growth model pushes up the value of the euro to levels that that make products of Germany’s euro zone partners less competitive, especially the southern countries that need a cheaper euro to compete.

What Europe needs is for Germany to grow instead by stimulating domestic demand, which would increase German imports from its European partners and eliminate the euro-boosting, beggar-my-neighbor effect by redirecting German productive resources from its export sector to the sectors that produce for domestic consumption. But this would require Germany to reduce its budget surplus by increasing government spending or cutting taxes, which is not about to happen.

The budget surplus is the tail that wags the dog in Germany. Instead of letting the budget adjust to its economic growth model, Germany does the opposite: It lets its growth model adjust to its budget policy.

Even the breakdown of the free-trade consensus in the world economy, and the prospect of a long trade war between the U.S. and China, can’t seem to budge Berlin from its obsession with preserving a budget surplus and pushing its exports.

Yes, if Germany was a small country, it wouldn’t matter. But because it’s a big one, German over-reliance on exports has become a threat to the economic fortunes of all the partners.

The folks at the European Central Bank also are losing patience with the German budget surplus, which is putting the entire burden for managing euro zone total demand on the shoulders of Europe’s central bank and its control of interest rates and the money supply. The one country in Europe that can afford to stimulate growth by cutting taxes or pumping euros into domestic programs refuses to do it because it would reduce its budget surplus.

It’s wrong of the Germans to look at budget policy as purely its own business when its refusal to engage in fiscal stimulus blatantly limits the euro zone’s options for boosting demand, pushing the ECB in times of stress into controversial areas like negative interest rates and the use of unconventional weapons like the bond-buying programs known as quantitative easing.

Recent evidence of how unpopular the German budget surplus and export-led growth model are in Europe came last Thursday from Germany’s Bundesbank President Jens Weidmann, who acknowledged in a speech in Hamburg that criticism of Germany’s budgetary and current-account surpluses is justified, and suggested that the tax burden on German companies is too high. Weidmann has been seeking European support for his candidacy to replace Mario Draghi in November as the next ECB president.

The clear implication of Weidmann’s startlingly candid remarks is that the German budget and current account surpluses have been a disaster for Europe. Let’s hope that other influential Germans start catching on, too.

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Melvyn Krauss is a senior fellow at the Hoover Institution at Stanford University and an emeritus professor of economics at New York University.

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