Home > EMU Crisis, Germany, Global Imbalances, Growth > Blame the World?

Blame the World?

Yesterday’s headlines were all for Germany’s poor performance in the second quarter of 2014 (GDP shrank of 0.2%, worse than expected). That was certainly bad news, even if in my opinion the real bad news are hidden in the latest ECB bulletin, also released yesterday (but this will be the subject of another post).

Not surprisingly, the German slowdown stirred heated discussion. In particular Sigmar Gabriel, Germany’s vice-chancellor, blamed the slowdown on geopolitical risks in eastern Europe and the Near East. Maybe he meant to be reassuring, but in fact his statement should make us all worry even more. Let me quote myself (ach!), from last November:

Even abstracting from the harmful effects of austerity (more here), the German model cannot work for two reasons: The first is the many times recalled fallacy of composition): Not everybody can export at the same time. The second, more political, is that by betting on an export-led growth model Germany and Europe will be forced to rely on somebody else’s growth to ensure their prosperity. It is now U.S. imports; it may be China’s tomorrow, and who know who the day after tomorrow. This is of course a source of economic fragility, but also of irrelevance on the political arena, where influence goes hand in hand with economic power. Choosing the German economic model Europe would condemn itself to a secondary role.

I have emphasized the point I want to stress, once again, here: adopting an export-led model structurally weakens a country, that becomes unable to find, domestically, the resources for sustainable and robust growth. And here we are, the rest of the world sneezes, and Germany catches a cold. The problem is that we are catching it together with Germany:


The ratio of German GDP over domestic demand has been growing steadily since 1999 (only in 19 quarters out of 72, barely a third, domestic demand grew faster than GDP). And what is more bothersome is that since 2010 the same model has been  adopted by imposed to the rest of the eurozone. The red line shows the same ratio for the remaining 11 original members of the EMU, that was at around one for most of the period, and turned frankly positive with the crisis and implementation of austerity.It is the Berlin View at work, brilliantly and scaringly exposed by Bundesbank President Jens Weidmann just a couple of days ago. We are therefore increasingly dependent on the rest of the world for our (scarce) growth (the difference between the ratio and 1 is the current account balance).

It is easy today to blame Putin, or China, or tapering, or alien invasions, for our woes.  Easy but wrong. Our pain is self-inflicted. Time to change.

  1. jpd
    August 16, 2014 at 7:54 am

    Reblogged this on DAMIJAN blog and commented:
    Iskanje odrešenja samo v tujem povpraševanju za podhranjeno domače agregatno povpraševanje ima en zelo velik problem: vsi ne morejo hkrati izvažati, nekdo mora tudi uvažati. In še kup drugih problemov, da to v nestabilnem svetu ne omogoča solidnega okrevanja, da nastop kriz zunaj (zmanjšanje rasti BDP v ZDA, ukrajinsko – ruska kriza, zmanjševanje rasti na Kitajskem itd.) vpliva na volatilnost domačega BDP itd.
    EU bo morala okrepiti lastno agregatno povpraševanje. Vendar ne na enak način kot pred sedanjo krizo, ko je Nemčija neto izvažala, ostale (periferne) članice evro območja pa neto uvažale, pač pa bo tudi Nemčija morala začeti več uvažati in zmanjšati svoj sedanji rekordni zunanjetrgovinski presežek. Rast na tuj račun lahko deluje zgolj kratkoročno.


  2. August 16, 2014 at 8:40 am

    Very good point. Just a typo: “The red line shows the same ratio for the remaining 11 original members of the EMU, that was at around zero for most of the period” -> around 1


  3. hanno achenbach
    November 9, 2014 at 10:45 pm

    It is easy today to blame Germany for our woes. Easy but wrong. Our pain is self-inflicted. Time to change.


  1. August 16, 2014 at 9:10 am
  2. August 16, 2014 at 9:32 am
  3. October 30, 2014 at 11:00 am
  4. November 3, 2014 at 4:40 pm
  5. December 17, 2014 at 6:04 pm
  6. February 3, 2015 at 11:31 pm
  7. October 21, 2015 at 2:45 pm
  8. October 26, 2015 at 11:48 am

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