A conversation with British Historian Adam Tooze Image may be NSFW.
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, teaching at Yale University, in the US.
© Jorge Nascimento Rodrigues, September 2012
The German model of success is unsustainable, although largely praised by academicians and politicians outside. American journalist Peter Ross Range wrote in the German newspaper Handelsblatt that even President Obama was curious about the German miracle of the 2000s. “Germany’s economic position is simply unsustainable.”, say, paradoxically, the British historian Adam Tooze at the most recent edition of Foreign Affairs magazine (September/October 2012).
His article titled “Gemany’s unsustainable growth: Austerity now, stagnation later” concludes: major present imbalances within Germany’s economy will have bad outcomes. They are the Achilles’ heels of Super-Germany. To clone this model, for example, extending the golden constitutional rule and the fiscal compact for the whole Eurozone, will be a major mistake. Berlin federal government and some economic schools of thought remains largely reluctant to consider the downside risks of the mercantilist-driven growth strategy and also of the constitutional golden rule from the 2009 balanced-budget amendment.
HUGE IMBALANCES
. Since 2000 net investment in Germany as a share of GDP has been lower than at any time in recorded history, outside the disastrous years of the Great Depression of the 1930s. Sustained low investment in the public sector and in German businesses will damage long-run growth prospects.
. Germany reported a current account surplus of 16.5 Billion euros in June of 2012. From 1971 until 2012, averaged 3.1 Billion euros reaching a peak of 22.5 Billion in December of 2009 and a record low of -13.3 Billion in January of 1998. The surplus status has come to seem like an instrument of great power politics, rather than an expression of the imbalances of the economy. This situation is not just destabilizing to Europe, it is also a threat to Germany’s long-run economic health.
. The Organization for Economic Cooperation and Development (OECD) announced that it expects Germany to post a current account surplus of $200 billion this year. The German IFO expects a surplus of 175 billion euros, larger than any other country, larger than China’s or Oil Golf Exporters’ surpluses. The current account surplus rose to about 6% of GDP. Germany has accumulated surpluses of about €1200 billion over the last decade.
. Given the massive fiscal pressure brought by the debt brake from the constitutional golden rule, domestic investment will slip. Prospects for renewed public investment will be even more dim. Private companies go global policies secured strategic positions in globalization. But this outside flight of private money was not balanced by domestic meaningful public investment.
. Germany loaned to Eurozone peripheral countries to buy German exports creating a sovereign debt vicious cycle. Nowadays, with the depression-austerity-lead strategies in the peripheral countries, exports from Germany felt 14.3% for Portugal, 9.4% for Spain, 9.2% for Greece and 8.2% to Italy. Germam Statistcs Office just disclosed that exports in the first half of 2012 grew only 0.7% to the other European Union members.
. German Exports shifted for out of the European Union. Since 2005, exports for China grew by 206%. In the first half of 2012, exports grow 19.9% to Japan, 18.8% to Russia, 18.6% to the US, but only 8.6% to China. Angela Merkel just visited China for the second time this year. China gave the privileged status of “strategic dialogue” to Germany; only the United States has this geopolitical privilege.
. Germany’s political system become increasingly fragmented.
INTERVIEW
Q: Recently we knew that Germany will have the biggest commercial surplus in the world in absolute terms, larger than China or the Gulf countries. The surplus ratio to GDP will be above 6pc in 2012, at the same moment that China shrinks its ratio to 2.5pc of GDP. Germany government do not consider this problem as systemic. What could be the consequences, particularly for the Eurozone?
A: When Germany sells more goods and services abroad than it imports, it creates an equal and opposite pressure in all its trading partners. Germany’s surpluses are the deficits of its trading partners. We talk moralistically about the virtues of exporting and the vice of deficits. But, in a system as tightly interconnected as the Eurozone, the two are directly connected.
HIGHLIGHT
« And, if investment is not increased, the long-term growth prospects are dim. Ironically, until the crisis erupted in 2008, this was no secret. Germany was widely criticized as the sick man of Europe.»
Q: You refer that Germany’s economic position is simply unsustainable. This could seem “a paradox” for common readers that see Germany as the European “tiger” of the 2000s and as an example of an economic miracle to clone. What is your main argument to convince these readers that they can be plain wrong?
A: When we equate the record surpluses from the 2000 onwards to a return to the “German model,” associating them with the memory of Germany’s extraordinary recovery after 1945 or with the amazing emergence of the Asian tigers, we are confusing ourselves. In fact, what we have seen since 2000 is not a triumphant return to a historically proven model. What we are seeing is its disintegration and corruption. In the 1950s a great leap forward in the German standard of living was helped by exports. Germans certainly worked hard and were modest in the demands for pay. But then, domestic investment in the German economy itself was booming. Germany did not just reconstruct, it transformed its domestic infrastructure.
Q: And what is the difference for today?
A: Today there are high exports and German workers have done without any substantial income growth in a decade. Profits are at record levels. But as German business globalized, investment flowed out of the economy. Capital investment within Germany itself was at record low levels in the last decade. I think the situation is unsustainable because I do not think that wages can be, or ought to be repressed into the coming decade. And, if investment is not increased, the long-term growth prospects are dim. Ironically, until the crisis erupted in 2008, this was no secret. Germany was widely criticized as the sick man of Europe. What cannot be sustained are the huge trade surpluses.
Q: But it seems, politically, people to not agree with the need to lose that power status…
A: Ironically, Germany could have a higher domestic standard of living and better long-term prospects, if it abandoned the model that has been hailed as such a success in recent years. Instead, we should be trying to think through constructively what a sustainable long-term policy stance for a rich, ageing OECD country actually is.
HIGHLIGHT
« Whilst restricting rogue actors at the local level, they should give strategic flexibility to a central authority, which should be democratically legitimated to make major spending and borrowing decisions under appropriate circumstances. To deny this, is to effectively rule out the possibility of intelligent democratic economic policy.»
Q: The so-called golden rule about the deficit ceiling and the sovereign debt has a recent history inside Germany. Now, Mrs. Merkel wants to extend the rule to Europe through a “fiscal compact” written in constitutions or important laws. You argue this blocking rule is a gross mistake. Why?
A: In complex federations, like the Eurozone, like the German Federal Republic itself, there are good reasons for adopting strong fiscal rules. They help prevent free riding. But these should be intelligently designed. Whilst restricting rogue actors at the local level, they should give strategic flexibility to a central authority, which should be democratically legitimated to make major spending and borrowing decisions under appropriate circumstances. To deny this, is to effectively rule out the possibility of intelligent democratic economic policy. Furthermore, whatever debt brake is applied should make a distinction between spending on current outlays and investment.
Q; In which sense?
A: Current costs should be tightly controlled. Adjusting for the business cycle, they should be covered from current income. Long-term investment, by contrast, is appropriately financed through long-term borrowing, particularly when interest rates are approaching zero.
HIGHLIGHT
« Nor do the surplus countries gain in the long-term from their uncooperative stance. The system that allowed them to produce their surpluses is driven to the point of collapse.»
Q: Germans usually remember the hyperinflation of the first “phase” of the Weimar Republic in the 1920s (before the Great Depression) as the argument against interventions in the monetary region even in depression periods. This German fear is justifiable?
A: Invoking a hyperinflation that happened 90 years ago under radically different circumstances is not politically serious. Nor do I believe that it has any real resonance in the German population. What does have resonance are positive memories of the Deutschmark after 1948. They learned to love the security provided by the autonomy of the Bundesbank, though that was never as absolute as is sometimes claimed. With regard to fiscal policy the Federal Republic does not have a truly exceptional track record. The current measures of restraint are driven in large part by a reaction against the over-spending of Germany’s own high debt states, e.g. Berlin or Bremen. They are a reaction to the internal crisis of Germany’s own fiscal union.
Q: The austerity program from March 1930 until May 1932 of Weimar chancellor Heinrich Bruening, whom people in the street called at the time the “Hunger Chancellor,” during the Great Depression, was the direct cause of the economic and political troubles in Germany that generated the Nazi takeover?
A: In 1928 Hitler’s party scored 2.6 % of the vote. The parties of parliamentary republicanism had a solid majority. By the election of July 1932 the Weimar Republic was in meltdown and Hitler’s party had soared to 37 %. The Stalinist Communist Party scored 14 %. There is no doubt that the global economic crisis is the basic driver of that disastrous development. Nor is there any doubt that Chancellor Bruening’s policies were deflationary and thus contributed to the rise in unemployment. But what ought to worry us is that Bruening did not actually perceive his policies as a choice. He was forced to deflate under the rules of the gold standard under which Germany had been stabilized in 1924. Without cooperation, especially on the part of the surplus countries, a fixed exchange rate system – like the gold standard, like the Eurozone – applies huge deflationary pressure to its weakest members, and this is even more so when the financial markets get spooked. Deflation, however painful, is part of the logic of the system. The lesson most economic historians draw from the 1930s is that you must either engage in cooperation, or, it is in fact better to break up the fixed exchange rate system.
Q: Without cooperation, especially on the part of the surplus countries – that sounds familiar. Something we can “clone” for the present times…
A: Absolutely. Then, Germany was the deficit country on the brink. Now it is the surplus country. Nor do the surplus countries gain in the long-term from their uncooperative stance. The system that allowed them to produce their surpluses is driven to the point of collapse. If the Euro goes my prediction would be that Germany will find itself in Switzerland’s situation, struggling to maintain its capacity to export. China will soon find cheaper providers for many of its machinery imports.
HIGHLIGHT
« In the event of a Eurozone’ collapse the Swiss taxpayer would suffer a serious loss. If the Eurozone were to collapse, Germany would face the same dilemma on a far vaster scale. A restored Deutschmark would surge. To hold the currency down the Bundesbank would have to intervene.»
Q: One of the consequences of the golden fiscal rule will impact particularly in public and private investment in the next years. You refer that net investment in Germany as a share of GDP has been lower than at any time in recorded history. This lack of investment will be the main flaw of the German strategy?
A: Low investment is indeed the truly shocking feature of German performance since 2000. It is directly connected with the export surplus. An export surplus is an export of capital. Those goods could have been consumed or invested at home. The low investment is most dramatic in the German public sector, where net investment fell into negative territory in the early 2000s. At that time, Germany was regularly lending more to foreigners to buy its exports than it was spending on its children’s education.
Q: Switzerland was the first to implement the fiscal golden rule and the debt brake in 2003. Nine years after that decision, how you see the results in Switzerland?
A: According to the Swiss data I have seen, it has had the predictable effect of reducing Swiss public investment to some of the lowest levels in the OECD. Furthermore, it has reduced the supply of Swiss debt to the bond markets. This has the effect of exacerbating the competition for Swiss assets, driving up the value of the Swiss Frank. The effect on Swiss exports would be terrible, were in not for the fact that the Swiss central banks is buying up Euros. This helps hold the Swiss Frank down and to sustain exports and jobs. But in the event of a Eurozone’ collapse the Swiss taxpayer would suffer a serious loss. If the Eurozone were to collapse, Germany would face the same dilemma on a far vaster scale. A restored Deutschmark would surge. To hold the currency down the Bundesbank would have to intervene. In effect, we would rapidly find ourselves reinventing the European Monetary System, with all its problems.
HIGHLIGHT
«China is exercising a positive influence in that Berlin realizes that to satisfy China it must go along with Draghi!»
Q: As a British historian specialist in German history do you think Merkel’s strategy aims to be the “hegemonic” power in Europe, using the present debt crisis of the “South”, and the economic problems at France and the UK, the rival Europeam powers?
A: No. The Germans are certainly exerting huge pressure on other Eurozone members. But this is not the expression of a German hegemonic strategy. It is not hegemonic since if the Eurozone members actually accept the German design, then Berlin will lose its influence over them. I see no reason to doubt that Germany would live as a cooperative member in a fiscally and monetary conservative European federation. As far as strategy goes, Merkel is a formidable tactician. But she is not a strategist. Berlin has been painfully slow to develop its longer term vision. Finally, it is the panicking financial markets, not Berlin, that are really driving the crisis.
Q: How do you evaluate Merkel’s strategy regarding China? It is the second time this year that Merkel flies to Beijing. Just securing German export markets? Gaining an ally for the Eurozone crisis management?
A: I don’t think that Merkel can be expecting much help from Beijing for a solution. The Chinese are pragmatists and basically “Keynesian” in their understanding of how to manage large market economies. I dare say they have very little sympathy for Germany’s failure to fix the Eurozone crisis quickly. I agree that China is exercising a positive influence in that Berlin realizes that to satisfy China it must go along with [Mario] Draghi (the chairman of the European Central Bank]!
Q: Daniel Gros, director of CEPS in Brussels, and Thomas Mayer, senior advisor of Deutsche Bank, suggested in the Financial Times that Germany can create a sovereign wealth fund which could invest excess German savings globally. How do you see this suggestion?
A: It is undeniable that given its ageing population Germany, like many other European countries should be building up a reserve fund of foreign assets, to help pay for the retiring generations. The real problem with the huge export surpluses was that they were uncoordinated with the rest of Europe. The profits that sustained the German foreign investment were inequitably distributed. And, the direction of the investment was poorly chosen. The European capital markets did a disastrously bad job at evaluating risk. So a strategic investment authority is an attractive idea. But, under current political circumstances, with the dominant German political parties having committed themselves to brutally restricting public investment, it is hard to see how such a constructive vision could be realized. Instead, what we see is the Bundesbank [the German central bank] effectively acting as such a vehicle, by accumulating huge claims on the rest of Europe, by way of the Target 2 balances. But this is a tactical, emergency measure, not a strategic vehicle. It, nevertheless, exposes the German taxpayers collectively to huge risks. ©
ADAM TOOZE (Yale University Bio adapted)
British historian Adam Tooze teaches at Yale University, in the US, all areas of modern German History, twentieth century economic history, social theory and the philosophy of history.
He received his first degree in economics from King’s College Cambridge, UK. Between 1989 and 1991 he studied at the Free University Berlin and took his Ph.D. in economic history from the London School of Economics in 1996. For 13 years he taught in the History Faculty of the University of Cambridge, before joining Yale University as Professor of Modern German History in the summer of 2009.
Books of reference
Statistics and the German State 1900-1945: the Making of Modern Economic Knowledge (CUP, 2001) explored the connection between the emergence of modern national economic statistics and the crisis of the German state in the first half of the twentieth century. It was awarded the H-Soz-Kult Prize for Modern History and the Leverhulme prize.
Wages of Destruction: The Making and Breaking of the Nazi Economy appeared with Penguin in 2006. It provides a novel account of the Third Reich viewed from the perspective of the regime’s efforts to harness the German economy for its bid for continental hegemony. It won both the Longman and Wolfson prizes, was shortlisted for the Duff Cooper and H Soz Kult prizes, was an Economist book of the year and has been translated into German, Italian, Portugese and Bulgarian. In Germany it has been adopted by the Bundeszentrale fuer politische Bildung.
Tooze’s current project is a history of the transformation of the global power structure that followed from Imperial Germany’s fateful decision to provoke America’s declaration of war in 1917. World fit for Heroes is due to appear with Penguin in 2012.
In 2009 Tooze was appointed to the academic panel charged by the Bundesfinanzministerum (Federal Finance Ministry) with writing the Ministry’s history in the period of the Third Reich. He has responsibility for the volume dealing with public debt