Frenemies: The U.S.-German Trade Story

Sparring between the countries could damage the global economy

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German Chancellor Angela Merkel and U.S. President Barack Obama speak at a press conference in Berlin in June.

How do you counter accusations of snooping on the German Chancellor? With accusations of mercantilism, apparently. That seems to be the tactic out of Washington, where the Treasury Department recently released a report blaming the Germans and their export-focused policies for Europe's debt woes. The timing of the salvo, which could disrupt progress on badly needed trade agreements, was awkward: the Germans were already worked up over reports that U.S. intelligence had been tapping Chancellor Angela Merkel's phone. To be fair, the Treasury critique--that Germany is essentially the China of Europe--is correct. German policies that keep domestic consumption low and exports high mean that the country's growth comes at the expense of everyone else, especially its weaker euro-zone neighbors. But it's a little rich that the report came out a day before President Obama pitched for foreign cash infusions into the U.S.'s export sector at the SelectUSA investment summit. (One selling point is the relatively low wages of U.S. workers--watch out, China!)

The irony underscores something more worrisome. The global economy is just as dysfunctional now as it was before the financial crisis. Imbalances that helped fuel the crisis--including the U.S.'s easy monetary policy, Europe's debt woes and China's overreliance on factories and state-run building projects--still exist. In fact, they've gotten worse. Postcrisis, the Federal Reserve has ramped up its program of asset buying, expanding its balance sheet from nearly $900 billion to $3.8 trillion, a money dump that many believe will ultimately undermine the dollar's value. Meanwhile, Europe still hasn't created a political union with a shared banking system and fiscal policy, which is the only way to truly address its economic troubles. And China is brewing up a real estate bubble that could make Arizona and Florida in 2007 look quaint.

What has changed is growth. It's slower. From 2003 to 2007, the world economy expanded faster than ever before. Since then, growth has fallen off a cliff, with the U.S. economy expanding 0.8% a year on average and Europe doing even worse. Meanwhile, the hollowing out of middle-class jobs has continued. Six of the 10 fastest-growing job categories in the U.S. pay $15 an hour or less. In Europe, double-digit unemployment is now the norm. In Greece, the youth unemployment rate is a breathtaking 55%. One high-level Greek official recently admitted to me that his advice to talented young people in his country is "Go abroad."

No wonder every country is focusing on how to grow the high-end manufacturing sector, the one area that still creates decently paying, middle-class jobs. One of President Obama's most highly publicized economic goals has been to double American exports in five years. Recent data is encouraging, even in the wake of the government shutdown and debt-ceiling wrangle. The Chicago Purchasing Manager Index survey for October showed the largest monthly increase in more than 30 years. Everything from jet-engine parts to toilets is made in the USA again.

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