Opinion

Euro meltdown won't be avoided by German makeover

By Matthew Lynn (China Daily)
Updated: 2010-07-01 13:02

Germany does have a big trade surplus: It was 13.4 billion euros in April. And it's cutting the budget deficit: Merkel aims to slice 80 billion euros from state spending, starting in 2011.

But that doesn't threaten anyone. Here's why.

First, the German trade surplus isn't what created the massive trade gaps in Greece, Spain and elsewhere in the euro area. While it is true that every surplus has to be matched by a deficit somewhere else, it doesn't follow that Germany created the black hole in Greek or Spanish finances. You could just as well argue that the Greeks and the Spanish created the German trade surplus by over-consuming, rather than saying Germany created deficits in other countries by not consuming enough.

In reality, the Spanish chose to base their economy on a construction boom, and the Greeks based theirs on lavish government spending. They could have created competitive, export-oriented economies. They didn't and there is no point in complaining about the countries that did.

Second, reducing the German trade surplus is the wrong solution. You might as well tell the Brazilian soccer team that it is allowed to play in the World Cup with only nine men on the field because otherwise it wouldn't be fair on everyone else. It's stupid. You can't improve the euro area's economy by telling its strongest member to weaken itself. You have to concentrate on the structural problems in the big-deficit countries. That's the only way to solve the crisis.

Third, rebalancing trade in the euro area won't work. There is about as much point in telling the Germans to embrace consumption as there is in asking Tiger Woods to take up celibacy. It isn't going to happen, so what is the point of asking? The only way the German government can engineer trade deficits - as Obama, Soros and Lagarde seem to think it should - is by offering even bigger stimulus packages.

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That would just make German households save more, fearing inflation and tax increases would follow. Frugality is in the national character. You can no more get the Germans to squander money than you can get the French to stop eating cheese.

The crisis of the euro won't be fixed by making Germany the scapegoat. The country runs a trade surplus because it makes lots of things that people want to buy: cars, machinery, pharmaceuticals and technical goods. The reason Germany doesn't consume as much as some economists and politicians say it should is because the people are averse to debt. Maxing out the credit card, which is part of daily life in the US and US, just never caught on in Germany.

Working hard? Making great products? Living within your means? Those aren't bad principles on which to base an economy.

Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.