Fat years for Germany alone? Is the German economic model Europe’s doom or fortune?”

Germany is one of the most highly developed and efficient industrial nations and, after the USA, Japan, and China, has the world’s fourth largest national economy.

With a population of 82 million, Germany is furthermore the largest and most important market in the European Union. Around one euro in four is earned from exports and more than every fifth job depends directly or indirectly on foreign trade.  The strong export-oriented nature of the German economy has always been the engine of growth. As Germany’s economy is very much export-oriented, it is also very export-dependent. The idea that Germany would be able to prosper while the rest of Europe is caught in stagnation  seems unrealistic for two orders of reasons.  The first reason has to do with the current development of German trade and its geographical structure. German exports, including those to other European nations, rose more than 70% from 2000-2008. According to the latest data released by the German Federal Statistical Office “Destatis”, in 2012 almost 70% of Germany’s exports (exactly 69%) were shipped to other European nations. Considering that Germany is more dependent on exports than virtually any other country in Europe, and that the key export markets for German exporters are located right on the country’s doorstep, the idea that Germany could be able to prosper while the rest of Europe is caught in stagnation sounds quite unconvincing.  The second reason why Germany would not be able to prosper is that if peripheral countries of the Eurozone were still faced in the longer term with the specter of years of low growth and high unemployment, they would continue to remain under enormous pressure from the markets. Consumption would be low and investors would be scared making the saga of the Euro crisis never ending, an outcome which would inevitably affect Germany’ economy. The secret of such excellent export driven performance lies both in the membership to the Eurozone but also in the ability of the Country to successfully construct over the years an economic model able to provide Germany with a distinctive comparative advantage in high end capital products. (Such an interconnected system gives a clear comparative advantage in incremental innovation. Coordinated market economies appear to be particularly successful  in generating high skill, high wage, high productivity employment because of their combination of patient capital and skilled labour.) Germans have greatly benefited from the membership to the Eurozone. It has given them an artificially weak currency, and the Country’s  competitiveness has improved, an outcome that would have been less likely with a strong Deutschemark. This increased competitiveness has resulted in enormous trade surpluses. Between 2000 and 2007, Germany’s current account balance increased from a deficit of 1.7 % to a surplus of 7.5%. Of course while Germany has benefited from the Eurozone as a better alternative to a German only stronger-currency scenario,  the other side of German success has a lot to do with the Country distinctive coordinated economic model. Germany’s ability to restrain wages in line with productivity gains and focus in durable goods, which reflect the Country’s perfect puzzle of institutional complementaries, is what has distinguished the country to other EU nations. While Germany generated trade surpluses, trade deficits emerged elsewhere in the Eurozone. The huge external deficits run in these countries were compensated with mostly credit-fuelled private spending. Then came the global financial crisis. Capital inflows  stopped and private spending collapsed, creating huge fiscal deficits. Despite Germany’s strong performance, there are still questions about whether the German economy is really suitable as a model and whether its successes is at all possible to replicate elsewhere. The German production structure is the result of a complex system of institutional complementarities and interdependencies which have made possible its success over the years. Many countries would benefit from imitating Germany in terms of recreating its strong comparative advantage, but there are limits.  The German model is almost inimitable because its parts are so well interconnected that it would be difficult to have the same economic gains Germany enjoys if the efforts of other countries were only limited to copy just a  few of its elements. While just copying the German model has its own limits, the reality is that there is a set of policies that peripheral economies can and need to do, and it is up to their policymakers to decide whether they can make the sacrifices these entail. Over the long term, higher productivity and performing labour markets are pivotal if peripheral countries aim to restore growth. They have to regain the competitiveness they lost in the first decade of the Eurozone, when their labour costs increased dramatically relative to those in northern countries.

The other limit to use Germany as a model has to do with the function of the Eurozone as a whole. A monetary union focused on fiscal rigour only, where the member countries do not produce strong differences in their trade balances, could paradoxically cause Germany to be “less German”, forcing it to renounce in part to its economic model driven by exportation, whose success has  also been due over the years to the European countries that have been acquiring German exports (generating trade deficit as a result). Germany aims to see its partners generating smaller fiscal deficits. If countries were actually to reduce their public deficit without a compensatory increase in German consumption, European domestic demand would undergo a strong decline, which would also affect German exports. The Eurozone, the world’s second largest economy, would then be on its way to become a big Germany, with chronically weak internal demand. The idea that Germany would be able to prosper while the rest of Europe is caught in stagnation  seems unrealistic for two orders of reasons.

The first reason has to do with the current development of German trade and its geographical structure. In 2012, the top country of destination for German exports was France followed by the United States and the United Kingdom. Germany exported goods worth € 104.5 bn to France (9.5% of total German exports), € 86.8 bn to the United States (7.9%) and € 72.1 bn to the United Kingdom (6.6%). Among the first top ten countries of destination of German exports, 8 out of 10 were Europeans and the only Asian country in the list, which was China, came only fifth, since German exports to China were worth only € 67 bn. This means that, despitetrade and economic relations with emerging nations in Asia are growing continually and Asia is now the second most important market for goods from Germany,  in 2012  only 16% of German exports went to this region vs 69% which were shipped to European countries. This allows us to say that Europe over the years has remained the major destination of German goods by a large margin. Over the years for  the majority of German exporters, the most important  regions  have been  Austria,  Switzerland,  Italy  the Benelux countries and France. Next come the countries  of  Central  and  Eastern  Europe  (CEE): Poland,  the  Czech  Republic,  Slovakia  and  Hungary. They are followed by the Scandinavian states.

Similarly, with regard to imports, most of the goods imported to Germany originates from Europe, precisely the Netherlands. In 2012, the countries ranking second and third were China and France. Germany imported goods worth € 86.6 bn from the Netherlands (9.5% of total German imports), € 77.5 bn from China (8.5%) and € 64.8 bn from France (7.1%).

Considering that Germany is more dependent on exports than virtually any other country in Europe and that the key export markets for German exporters are located right on the country’s doorstep, the idea that Germany could be able to prosper while the rest of Europe is caught in stagnation sounds quite unconvincing. The second reason why Germany would not be able to prosper is that if peripheral countries of the Eurozone were still faced in the longer term with the specter of years of low growth and high unemployment, they would continue to remain under enormous pressure from the markets. Consumption would be low and investors would be scared making the saga of the Euro crisis never ending, an outcome which would inevitably affect Germany’ economy. Germany needs Europe firstly because it has much benefited from belonging to the Eurozone and secondly because countries faced with perpetual economic stagnation will continue to make everyone burdened with the pressure of a chronic unresolved crisis. The idea of a “two-speed” Europe, where strong members would grow closer while peripheral members would be left to their destiny, is not going to work. Germany’s future is inextricably intertwined with that of the Eurozone. Germans have greatly benefited from the membership to the Eurozone. It has given them an artificially weak currency, and the Country’s  competitiveness has improved, an outcome that would have been less likely with a strong Deutschemark. This increased competitiveness has resulted in enormous trade surpluses. The Euro has played a significant part making German exports more than doubling, going from around € 469 bn in 1999 to well over € 1  trillion in 2012. Absent the Euro, many southern countries would have likely devalued their national currencies. For Germany, a weak currency and the inability of the other Euro member states to devalue, has been advantageous to its competitiveness.