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Prospering at the Expense of Others? Germany's Export Boom Has Trade Partners Stewing

By Armin Mahler, , Wolfgang Reuter and

The German economy is rapidly improving, with many manufacturers struggling to keep up with demand. But not all are happy with the country's recovery. Many say that Germany's export gains are coming at the expense of its trading partners.

Photo Gallery: The German Export Boom Photos
dpa

Only a year ago, the German company Getrag was on the brink of bankruptcy. An auto parts supplier based in southwestern Germany, the company had been hit hard by the economic crisis. Revenues had dropped by 25 percent, to about €2 billion ($2.45 billion), and the company was forced to reduce its workers' hours under the government's "short work" program. Only a state loan guarantee saved Getrag from falling victim to the crisis.

Today the company is inundated with orders. BMW alone orders 140 transmissions a day, even through Getrag can only manage 120 per day. "Week after week, I sign requests by the company to have its employees work on Saturdays, Sundays and holidays," says Frank Iwer of the district office of the metalworkers' union IG Metall in the southwestern state of Baden-Württemberg. Iwer is familiar with many cases like Getrag's: the machine builder that is hiring large numbers of new workers; the manufacturer of packaging machines that has retrieved almost all of its employees from the "short work" program; the small supplier that rehired all 24 workers it had recently laid off because the business climate unexpectedly improved.

Suddenly there is good news coming from German companies again. Some are so busy that they have added extra shifts, while others have shortened their summer shutdown periods to satisfy global demand.

The German economy was more severely affected than most by the global recession -- few other economies are so skewed toward exports and so dependent on the global economy. When the global economy took a nosedive after the near-collapse of the financial markets, the German economy shrank by 5 percent in 2009. Some companies saw revenue declines as high as 50 percent.

Back on Track

But now, the world economy is back on track and growing even faster than expected. Demand for German machines and automobiles has spiked upward. Sales are still not back to pre-crisis levels, and setbacks cannot be ruled out given the tense situation on the financial markets. Nevertheless, Germany's comeback has sparked renewed criticism of the German economic model.

Germans are living at the expense of others, say detractors, because the country's trade surpluses mean that countries with already large deficits will have to borrow even more. The Germans, they say, are also gaining competitive advantages in unfair ways, because of the weak euro and a reluctance to increase wages. On top of all that, Germany refuses to stimulate domestic demand, say critics, which would improve foreign producers' prospects of selling their goods in Germany.

For decades, the Germans were admired around the world for their export industry and high-quality products. Now, that has changed. Now, Germany is seen as an egoist who refuses to play by the rules. Once a role model, Germany is now the global bogeyman.

Leading the charge are US President Barack Obama and Treasury Secretary Timothy Geithner. They are supported by Paul Krugman, the Nobel laureate in economics, and billionaire George Soros, who cultivates the self-image of the enlightened speculator. They are all calling on countries like Germany to abandon their thrifty policies and launch new economic stimulus programs.

There is also pressure from Europe. Politicians like French Finance Minister Christine Lagarde accuse Germany of growing at the expense of other euro-zone countries. The crux of the accusations is Germany's effort to curb increases in unit labor costs, thus taking market share from others. Greece uses the same argument when blaming Germany for being partly responsible for its dire fiscal problems.

At its heart, the critique is aimed squarely at Germany's export industry. Many economists hold that global trade imbalances are one of the causes of the economic crisis. They are thus calling upon the Germans to do nothing less than embrace an entirely new economic model.

Thrown Out of Balance

It is hard to deny that the world has been thrown out of balance. The United States, for example, has been living beyond its means for decades. It imports far more than it exports, and it pays for this deficit by borrowing from others, mostly China, which has already accumulated foreign currency reserves worth $2.5 trillion.

But if the US is living beyond its means, then, according to this line of thinking, surplus countries like China, Germany and Japan are living well within theirs. They produce more than they consume, which forces them to invest their excess cash abroad -- in American and Greek government bonds, for example.

Surpluses are only possible when others have deficits, and the greater the imbalance, the greater the risk that the growing tensions will eventually erupt. Global leaders agreed to address the problem last September at the G-20 summit in Pittsburgh. But the question remains: How?

In an ideal world, this occurs automatically through exchange rates. Exports provide a country with profits, resulting in rising wages and more expensive products. This automatically curbs exports. In addition, the leading industrialized nations often require payment for their exported goods in their own currencies. This means that as a country's exports grow, so does the demand for its own currency, thereby increasing the value of the currency. This currency appreciation likewise curbs exports by making them more expensive.

The unfettered interplay of these economic forces produces a tendency toward equilibrium. Competition creates affluence, which in turn counteracts competitiveness.

Artificially High

So much for theory. In practice, the Chinese have invalidated this principle with a trick: Instead of being paid for their exports in their national currency, they are paid in dollars, which they then use primarily to buy American treasury bonds. This keeps the value of the dollar artificially high, while the Chinese yuan remains relatively weak. As a result, Chinese goods are dirt cheap, enabling the country to unseat Germany as global export leader.

A new equilibrium can only develop if China stops keeping its currency artificially undervalued. In the past, the country has consistently rejected the West's demands that it alter its currency policy. But shortly before last weekend's G-20 summit in Toronto, Beijing signaled that it might be willing to budge.

The announcement that the country planned to revalue its currency triggered euphoria on global markets. Disillusionment quickly set in when it became clear that Beijing only intends to make minor adjustments in the value of the yuan. Nevertheless, the move enabled China to redirect criticism toward other countries with trade surpluses, including Japan and, most of all, Germany.

But what should Germany do? The country doesn't have its own currency that it could appreciate to make German exports more expensive.

Even worse, critics say, Germany is benefiting massively from the current weakness of the common European currency. Several member states have gambled away their creditworthiness, resulting in the euro's recent freefall. But the euro's woes are a boon for the German economy, which can now sell exports more cheaply abroad.

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1. via fCh
viafCh 06/30/2010
The just concluded G-20, where the US was part of a minority of 3 calling for more spending, countries agreed to disagree, otherwise the default option in a quickly diverging (unraveling?) world. On the one hand, smaller countries may be reluctant to keep spending, thus growing deficits and possibly losing some of their sovereignty--see Greece, that little economy that was used to remind some that they cannot undo 50 years of prosperity just by offering savings and trade alternatives to the dollar. On the other hand, if the US believes in stimulus, what's there to stimulate anymore, besides deficit-growing consumption? The US move could be seen as an effort to make to world in the eyes of the bond-holders/buyers equally leveraged. All in all, I expect that what I wrote more than 2 years ago to increasingly become part of our daily lives, protectionism. Who said that the renewal part of capitalism was fun? Given the current strengthening of the power of the US executive branch, I wonder how prepared the system will be to cope with a downward readjustment. On paper, the government and the corporations look stronger by the day. In reality, a major diversion will be required to put all that in motion. http://imotion.blogspot.com/2010/06/condensed-thoughts.html
2. Thrift.
Clarence De Barrows 06/30/2010
Stay the course, Germany! Let the pundits in the rest of the world opine and chastise all they want, you are on the right path with Merkel. As a citizen of the U.S. of America I can only hope we get rid of our fiscal idiot of a President before he and those who think like him totally destroy our Country.
3. American hubris
golestan 07/01/2010
QUOTE: Leading the charge are US President Barack Obama and Treasury Secretary Timothy Geithner. They are supported by Paul Krugman, the Nobel laureate in economics, and billionaire George Soros, who cultivates the self-image of the enlightened speculator. They are all calling on countries like Germany to abandon their thrifty policies and launch new economic stimulus programs. UNQUOTE It is typical American arrogance to presume, that the world should dance to their tune. It is especially impertinent, that after they caused a major world recession with the unbridled recklessness in their financial markets fed by irresponsible greed, they are pontificating, how others how they should conduct their affairs. Nobel Price or not, most Americans lack the understanding, that other economic models, than inland consumer driven ones, are preferable for other countries.
4.
BTraven 07/01/2010
Perhaps I have missed it but has Germany not credited its exports? A part of money it got had been invested in subprime mortgages which had to be written off during the crisis. Why it is not mentioned that Germans worked without getting paid for it?
5. Devaluation is not the only option.
Charel 07/01/2010
Zitat von sysopThe German economy is rapidly improving, with many manufacturers struggling to keep up with demand. But not all are happy with the country's recovery. Many say that Germany's export gains are coming at the expense of its trading partners. http://www.spiegel.de/international/business/0,1518,703617,00.html
The fallacy of using the exchange rate to equalise the competitive position of deficit countries vis a vis those running a surplus on foreign trade is illusory. It simply means that devaluation makes everyone poorer. The same result can be achieved by properly implemented reforms of the drivers of competitive factors in the economy. All that is needed is the political will and the acceptance of the electorate. To achieve such a result educating those affected is necessary. Devaluation impoverishes just as much as improving competitiveness but improvement requires direct action instead of stealth. Germany understands this while others prevaricate.
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