G-20 Rules; Time for Germany-Bashing

This guest post is by Arvind Subramanian, senior fellow at the Peterson Institute for International Economics. 

Yesterday’s announcement by China to introduce greater exchange rate flexibility is unambiguously good news. Greater currency flexibility will help China with its domestic overheating problem.  But China deserves a lot of credit for its act of responsible international citizenship, for making its contribution to global re-balancing. Two implications follow.

First, the G-20 deserves a lot of credit for the change in China’s policy. True, Secretary Geithner played his cards skillfully, balancing private chiding with public encouragement. It is also true that recent sabre-rattling by the US Congress to impose trade measures against Chinese exports may have played a role in persuading China. But it is the fact of the G-20 that allowed Secretary Geithner to convert the China currency issue from a bilateral US-China matter (on which little progress had been made for many years) to one in which a broader set of countries had a stake. The public pronouncements by Brazil and India earlier this year re-inforced this “multilateralization” of China’s currency undervaluation.  This multilateralization had two positive effects. It forced China to take more seriously the international consequences of its currency policy. And it also made the politics of changing policy easier because China is seen not as caving to bilateral pressure but as responding to the wider international community.  Regardless of what happens at the G-20 Summit in Toronto over this week-end, the G-20 can already count the change in China’s currency policy as its victory. 

The second implication is this: with China having made its contribution to global re-balancing, it is time to demand the same of Germany, which is the other large surplus country in the world economy, and which has just received a steroidal boost of competitiveness with the decline of the euro.  Where China was an intentional mercantilist, Germany has become an accidental mercantilist, which will further increase its current account surplus.  But Germany has responded by announcing fiscal consolidation. Some have excused this action on the grounds that the tightening involved would be small and back-loaded. But this misses the key point: Germany’s action has the wrong sign: it should be expanding demand, not just for the sake of global re-balancing but to provide some growth impetus to its dire Southern European neighbors. But in fact it is now reducing demand.  If this continues, the spotlight will have to be on Germany. China-bashing is now likely to cede to Germany-bashing.

37 thoughts on “G-20 Rules; Time for Germany-Bashing

  1. ” unambiguously good news”

    Yeah right

    “announcement by China” and “unambiguous” should never be used in the same sentence.

  2. So what does the author suggest Germany should do?

    Leave the EURO?
    That would be suicide on the export side as the new DM would be brittle hard and loose all European customers and the rest of the world right thereafter. Plus, it would make all remaining EURO members’ debts a paper recycling issue at best.

    Stay in and strengthen Germans’ purchase power?
    Fine; would that do enough to ever reverse the birth defect of the EURO and pay for the ongoing adjustments while self-made depression falls upon EUROland?

    If one needs a definition of a classic catch 22 situation, the EURO story is just that. Created by people who were stupid enough to believe in an artificial currency imposed on unequal want to be partners calling it EURO; most likely the same people that now believe in China going anywhere near jeopardising its export power by appreciating what is again: paper money.

    Poor souls.


  3. China will protect its interest, and its interest, only; so its aim is to balance its export power against its remaining reserves in Dollar until those are well spent; invested in all kind of global resources and assets that will secure survival and even gain from the currency collapse due.

    Time to learn…


  4. Actually, China’s announcement changed nothing, and it only clouded the issue of Beijing’s currency policy intent.

    …nothing about when China would strengthen its currency more than has been said.

    …conflicting criteria and goals for managing Chinese FX policy.

    …greater flexibility (if anything) in undermining the US dollar, not allowing it to stabilize.

    …and so on.

    Those who can not understand Chinese double-speak really shouldn’t be commenting on it.

  5. Don’t you think that maybe we need to wait and see if and how China follows through?

    But in any event, it is not just China and Germany any more–it seems to be most nations, and even parts of nations. Apparently mercantilism is back globally.

  6. Some interesting light on Germany: Germany’s super competitivenss: A helping hand from Eastern Europe

    ‘Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine.’


  7. Good point: Germany is in this light, a leader in a European economic order, whereas in China it is all internal, like the USA in the 1950s.

  8. Dyadic is the best way to describe China’s yaun being appreciated? The people in most provinces are desparate for pay equality before an uprising occurs, and the chinese government is well aware of the social undertones in this so-called utopia, “Great Republic of China”. The subject has now been shelfed for the G-20 discussions, and when…and what increments are too incur are sketchy at best via their past syllabus yellow-hubris! How dare anyone think of bashing the German’s for doing the right thing – preserving rightous financial habits, hence others ignored! When Germany bought/merged with Chrysler it was their biggest mistake/debacle of the decade plus, but fortunately was recified quickly by selling off Chrysler. The dichotomy of German working habits – their superb craftmanship, and pride – the very fact that they can make any product they so choose too endeavor the best in the world speaks for itself. The US is in a landslide – the Europeans know it, and believe me the Chinese have known for years. Funny how I thought of this – this very moment remembering that crazy Russian President Mikal Kruschef saying/shouting in the 60’s at the United Nations… (I think he even took his shoe off to pound the podium?) Quote: “We (USSR) will give you (USA) the rope to hang yourself with! end quote. But here’s the rub, or is it the fly in the ointment – It is the Chinese giving us the money to crate our financial ruin? Rope/Money equates to Rope-a-Dope,…America should just become an isolationist for a decade or so, and live off the land?

  9. I think the Euro is doomed in the long run anyway. It really seems impossible to have a currency union without a governance union and maintain reasonable stability for all members, particularly if there’s great economic disparity between member states.

    Not necessarily saying Germany needs to leave it right this second, but thinking the Euro will stay around is wishful thinking.

  10. America won’t isolate itself for the purpose of careful introspection and self-evaluation. If it does it, it will be out of paranoid xenophobia and fear of terrorism.

    We are no longer a country driven by great dreams, a brave heart, and a burning desire to become better each day. We’re now driven by fear, greed, and desperation not to be left behind. We need the introspection you speak of, but we sure as hell won’t get it any time soon, unfortunately.

  11. More and more controversy on just how effective current psychotherapy techniques are. Sooner than later is will become clear what the “shrinks” are doing :-)

    Was it just me who was ashamed by the stats that Calderon used in his speech to the citizens of Mexico – the stat about USA being the biggest CONSUMERS of “drugs” on the planet right now…

    Look, why waste time? Here’s how it goes:

    “I didn’t do it.”

    “Okay, I did do it”

    Then it used to be “I’m sorry”.

    Now it’s “YOU must forgive me even if I am not sorry I did it because it will help YOU feel better.”

    Roll up and dismantle Criminal Inc. – then see how you “feel”…maybe better?

  12. Yeah, the first thing I noticed in the announcements was the vagueness leaving the door open to… well… anything they want to do, including pretty much staying put. We’ll see how genuine their intentions are in the coming days. They DO have to unhinge from the dollar at some point though. It’s just a matter of when, not if.

  13. The notion that Germany will be bashed now because ‘China has done its share’ is no doubt the intent of this announcement by China – and the only intent.

    Look for a 1% change, then another two years of currency peg plus soaring surpluses.

    We have an entrenched mercantile regime and one that is highly skilled at delivering on the aims of its elites. China is not interested in being a good global citizen. The Americans are patsies.

  14. I’m guessing Mr. Subramanian is a hyper-educated dude. At least a Master’s and maybe a doctorate. Isn’t it sad, all that education and Subramanian can’t decipher Chinese lip flapping and Chinese action???

    Oh well, maybe Arvind is a young boy…. could be other possible explanations, but I’m going to be nice Ted today.

  15. Agreed. Unless backed by action, China’s announcement means nothing. They have not committed to anything of substance.

    My personal guess is that China will allow their currency to appreciate by at most 3% a year – far less than is needed – and likely much less without continuing outside pressure. The only pressure that matters is restrictions on trade. Trade should be restricted as long as China is buying dollars to keep the Yuan low.

    Without active work on trade restrictions in Congress, I would expect no action of substance on revaluation from China.

  16. They had to at least say something, you know, to make Clinton & Geithner’s junket look moderately successful. Come on, its time some investigative journalist dug a little deeper to determine what the ‘actual’ quid pro quo is …

  17. 3-D,
    No, wait, you can’t argue that. First, your words are too reality based. Second, if Germany decides to keep fiscal discipline, maybe people will figure out IMF is a totally useless institution. No you’ve broken all the proper rules of dialogue here.

    We won’t allow truth telling. You’ll need to get some talking points and cue cards from the Peterson Institute to copy from next time.

  18. Those who believe “re-balancing” is achievable in the framework of a wildly imbalanced arrangement such as possesses banking institutions holding more bad paper than you can shake a stick at existing atop physical economies incapable of producing such surpluses as can keep current even paper that still has a market, well, such are weak minds that fail to grasp the significance of the American Revolution, as well as the fact that, any further ratcheting toward a more overt fascist arrangement likely cannot be accomplished in piecemeal fashion (as the author seems to think), but rather will more likely require radical attacks on national sovereignty everywhere.

  19. I dont see any improvement in the long term, this is pure rhetoric . Now every body is happy, lets see how much China will devalue its currency. There is a false sense of rebalancing, 20 years ago when a country produced all king of goods was possible, now thanks to globalization thats an utopy. China will not consume internally part of its exports and the increase in imports will be marginal.

  20. http://seekingalpha.com/article/206830-how-china-is-changing-the-world#comment_update_link
    This above (link) article is a conservative but
    Smart and neutral evaluation without the bias of consensus or consignment in its overall measures.

    One “thought” however on the scope and scale of observation which obviously has many moving parts. It occurs to me that each bilateral analysis based upon hemispheric delineations are reasonably correct in some retrospective and relativistic way. As we look to the composite pictures, meanwhile, we must divide both China and the USA into their independent domestic vs cross border interests and Germany has acted as an independent agent doing the same thing. Everyone is playing the principal/agent paradox of interests(factions/fragments/tier segments & classes) which all create “Silos” of nation state consensus among both true investors and their predatorial countra-parts//counterparts …the opportunists and speculators for pure exploitation on the dollar (or currency of your choice).
    Now that starts to get complicated enough but now tie in the state sponsored “capitalism” with monetarian carry trade interdependencies that these distinctive sectors all mutually share or risk. Complication leads to a matrix of intricately divisive balances…and tipping that balance now leads to profits or losses from both/either/partials of each or the other. Now the playing field is becoming multidimensional. Now just one higher level to complicate “scope” is to compound the interplay of both the Euro and the Petrodollar (I won’t even try to indicate the political and financial implications of these catalysts, the currency interests in supremacy and reserve status in the carry trades and tripping points to a very edgy status quo…) and just for good measure add in the anarchist market scenario of grab bag ethics and morality…and we end up at the hedging line with cluster groupings of chaos and complexity, while contemporary monetary theorists are leading the blind. Advising China to change? This dog has two tails! Both seem to be wagging the dog!

  21. Oh earle,florida my friend. Enjoy some good news.

    Chinese imports to the U.S. will rise in price. This alone may encourage some so-called Americans to reinvest and produce here.

    No panacea mind you but it does help.

  22. To Everybody,

    It never ceases to amaze me how the media and most Westerners overrate the Chinese miracle or juggernaut.

    Fact is, Chinese accounting principles make the Enron boys look like pikers. China builds entire cities where nobody lives and remain largely vacate. It has no EPA standards and will soon be the world’s largest polluter. And as Mr. Subramaniun accurately states is on the verge of civil unrest due its lack of a social safety net.

    Add it all up and it spells PAPER TIGER.

    All the best,

  23. Great – a bunch of nihilistic hedonists have proclaimed themselves to be in charge of economic “complexity”!


    Quite the global “vision” – humanity as fish and earth as the barrel and $$$ as the bullets to shoot the fish in the barrel…

  24. China already is the largest polluter; we just don’t measure all of it. Being able to pollute is a huge competitive advantage. Sure, it will eventually catch-up with them, but China is the fourth largest country, just barely smaller than the USA. This leaves lots of land to destroy before it is time to pay the piper.

    China “on the verge of civil unrest”? That would be true except for their pesky army which tends to crack down rather mercilessly.

    A paper tiger? Try reading my blog post “The coming USA-China war” (http://saucymugwump.blogspot.com/2009/11/coming-usa-china-war.html). China is no joke.

  25. True China has increased its military spending, saucymugwump. Estimates from our military-industrial complex suggest China will reach relative parity by 2020.

    However, I understand that we’ve made it plain to the Chinese that we can and will take out its leadership if there is war. Do you think they’re dumb enough to risk it?

    I also should have added that due to pollution and lack of arable land, China is a net importer of food. We are their grocery store.

    To become the leading superpower, China will have to become more like us, not less.

  26. So let’s get this right: we’re dealing with a debt crisis, and Germany is told to increase its debt to solve the debt problems of other countries?

    A century ago, more or less, the developed nations of the world started to run their public finance as a Ponzi scheme, and since the 70s they’re taking on increasing levels of explicit public debt. Taking on even more debt will set things straight, yeah right.

  27. Right under what circumstances?

    When government deficits at 10%+ of GDP are becoming the norm for a lot of the leading economies?

    When the unfunded liabilities for pensions and health care that in most developed countries are in the 300-600% of GDP range will within the next decade start to become a short term rather than a long term issue..?

  28. Re: @ Brad Thrasher____Indeed…touched on subject matter mentioned when first joined in on this wonderfully enlightening forum after watching Bill Moyer’s introduction of Simon, and James “13 Bankers” April 17,2010. I was a big “World Focus” fan (PBS-cancelled?),and driven CNN’s “Lou Dobb’s” follower/soldier…but of course his censorship has hastened my opinion to downgrade the network to “Junk”! I thank you…,and for all of us the reminder too “Buy American” wherever/when possible.

  29. Japan sets the example of how much debt helps to balance trade accounts. Does Japan run trade deficits by now? I didn’t know. Moreover, with a profligate Germany, the Euro might trend even lower over fears who pays European debt, further increasing German exports.

    I do not know how a democratic nation may limit exports with unemployment high. Export tariffs work without doubt but they are suicide for the government that tries.

    So, don’t blame Germany.

  30. Obviously the solution is to return to the sustainable economy of a century ago. Long live the Austro Hungarian Empire!

  31. People today have come to expect growing economies as a matter of course, and you cannot grow an economy without growing demand beyond current output (and therefore wages). That is a simple fact. And you cannot grow demand beyond the level of current output and income without either 1) the creation of debt, or 2) exports, i.e. foreign development, or the foreign taking on of debt.

    But perhaps there is an alternative. Ideally, instead of “debt” being the sole facilitator of demand creation, a loose monetary policy and rising wages should be the main facilitator. And when debt is used to create demand, it should be used to implement the advances of science and technology in a way such that the return on expenditures will be greater than the amount of debt taken on.

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