Germany Needs A Strong Europe Less Than Europe Needs A Strong Germany

Hamburg, Germany

Photo by Matthew Yglesias

Heather Rogers, writing for NPR’s Planet Money, writes that Germany needs a strong Europe, which is certainly the bien pensant thing to say about the situation. Her key point is that the inauguration of the Eurozone and the tumbling borrowing costs in Southern Europe fed a German export boom. That entire dynamic is now fading away “and now that its customers’ economies are falling to pieces, Germany is going to feel the pinch.”

That’s all completely correct, but what it suggests to me isn’t so much that Germany needs a strong Europe as that Germany needs to reconfigure its economy so that households can enjoy a higher level of consumption. As a general matter, configuring the productive side of your economy so that its geared toward creating goods and services that your customers can only buy with money they’ve borrowed from you is a pretty unwise policy. Germans don’t want to make open-ended fiscal transfers to their southern custoers and they say they don’t want to keep rolling loans over to them either. The appealing alternative to these strategies would be either for Germany to keep more German-made stuff at home (what if Germany exported less, but everyone drove a somewhat nicer car?) or else for Germans to get more non-German stuff in exchange for all the German stuff they’re sending abroad (what if Germany exported as much as it does, but everyone starts using really fancy olive oil?), thus raising actual incomes in Germany’s trade partners. Something along these lines – a lower Value Added Tax, a relaxation of regulatory curbs on retail store hours, less focus on funneling peoples’ income into the landesbanken – seems to me to be the necessary complement to reforms in southern Europe.

It’s not that Germans are somehow under a moral obligation to raise their living standards as a favor to their trade partners. It’s just that it’s a bit absurd for reduced German lending to Spain to cause Germany’s output of goods and services to decline. Everyone will be happier in the end if Germans use more of their income to buy things and less of it to make bad loans.