Judging from the recent comments of U.S. policymakers and commentators, it's not hard to pinpoint the greatest impediment to global economic recovery: the know-nothing, beggar-thy-neighbor policies of Germany. Policymakers in Berlin are portrayed by everyone from President Barack Obama to New York Times columnist Paul Krugman as single-mindedly focused on increasing their country's exports and keeping down domestic demand, even at the expense of prolonging or deepening the global recession. Why can't the Germans just reach into their pockets and support global consumption at a time when the United States and other indebted countries have to exercise restraint?
The problem is it's a lot harder than you'd think to get Germans to spend their money.
Thrift is practically part of Germany's national identity. A recent commercial ad campaign ran with the claim Geiz ist geil -- "Stinginess is cool." And the statistics bear out the slogan. In 2009, the savings rate of the private sector stood at 22 percent of GDP, compared with 12 percent in the United States. Private consumption expenditure rose 0.2 percent between 2002 and 2006, while it increased 3 percent in the United States and 2.7 percent in Britain. Polls show that Germans prefer having their taxes raised and public spending cut: It is hard to imagine a government in any other country overstating the size of an austerity package for the sake of popularity. In Germany, that's precisely what just happened.
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Cultural factors play an important role: Whereas the Anglo-Saxon world is characterized by what one could call pragmatic optimism, Germans instinctively think about the long term, and they aren't disposed toward cheerfulness. Whereas America's recent history teaches hope, Germans see in their history the need to be cautious: In the last 100 years, Germans have experienced two currency reforms and the rise and demise of three regimes.
Political instability isn't much of a concern anymore, but the mindset remains. Germans today still think of credit as morally dubious, if not pernicious. It's telling that the German words for debt and guilt are identical: Schuld. And German consumers instinctively think of bad times as just around the corner, so they save money as a precautionary measure against the next crisis that's sure to come. For instance, with the country's population now rapidly aging, many Germans are saving money in anticipation of the imminent demise of their pay-as-you-go public pension system. In fact, Germany is likely the only country in the world where Ricardian equivalence -- the theory that the government cannot stimulate private consumption by cutting taxes because rational actors know that taxes will eventually have to rise again and therefore put aside savings -- actually holds true.
It's not only Germans' propensity to save that's at issue, but their easy assumption that economic activity consists primarily of foreign trade. It's an economic model that traces back to the beginning of the postwar period, when booming exports were the backbone of the Wirtschaftswunder, or economic miracle -- the period of strong growth in the 1950s that transformed the destroyed country into a major world economic power. When Germans saw Volkswagens on roads all over the world, it wasn't only a source of income, but proof that the country was once again an accepted member of the international community. Add Germany's traditional obsession with engineering and its distaste for the service sector, and it may become clearer why the country is prone to mercantilism.
Germans have embraced this outmoded economic formula, even though it has essentially imposed years of mild austerity measures on the country. To boost exports, Germans have had to increase their competitiveness through stagnant labor wages. Unit labor costs fell 0.1 percent between 2002 and 2006 in Germany, while they rose an average of 1.6 percent in the eurozone. But Germans don't rebel against that lack of wage growth; they join the country's economic establishment in interpreting it as a strength. Indeed, the major trade unions were involved in negotiating the wage levels.
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