Is Europe’s Complacency America’s Fault?

Back in the 1940s, after the calamitous events of World War II, the key players in Washington’s corridors of power fretted over a terrifying prospect.

They could easily envision the technologically innovative products that the United States could produce. Trouble was, the rest of the world — bled nearly to death by war — would not be able to afford them.

It was this concern about another economic depression that, along with the Soviet threat lurking behind the Iron Curtain, energized Washington’s policy makers to implement a plan that spawned capitalism’s golden age.

Their global plan did not just encompass Bretton Woods and the Marshall Plan. There was also a concerted campaign primarily designed to help the Germans get out of their peculiar pickle.

Based on the precedent set by the 1919 Treaty of Versailles (only this time without any question of its culpability for the war), Germany faced a predicament after 1945 that bade very poorly for any prospects of it recovering.

The package of measures driven forward by Washington included firm steps to:

• Write off Germany’s wartime debts
• Spare Germany the deindustrialization that France and Britain wanted to enforce upon it
• Cajole the Europeans to move in the direction of a common market
• Create the circumstances for the Japanese industrial miracle, even if this meant opening up U.S. borders to Japanese imports with detrimental effects on American corporations.

In short, after the war, the United States accepted the challenge of putting its own surpluses at the disposal of a global economy. That meant, first and foremost, to generate the aggregate demand to get all the war-torn economies going again.

To ensure the success of this post-war recovery, the United States carefully monitored and calibrated global demand to minimize the likelihood of another Great Depression.

That formula worked spectacularly for a long while. However, over the course of that recovery campaign, both Germany and Japan eventually forgot that they were indeed not independent actors, but “patients” being carefully nursed back to health.

When the United States lost its surpluses toward the end of the 1960s and the Bretton Woods system collapsed soon after, a new phase began.

The United States assumed the role of recycling global surpluses (even if this time it was no longer its own but other countries’ surpluses that were being recycled). The country acted, in fact, as a gigantic vacuum cleaner, sucking up the net exports of Germany, Japan and, later, China into its territory.

Because of America’s readiness to do so, all that the Germans, Japanese and Chinese had to worry about was the desirability and cost of their products. The demand was made in America.

Then, of course, the 2008 crash happened — and it changed everything. When Lehman Brothers disappeared from the map and Wall Street entered into a tailspin, it was not just the pyramids of toxic derivatives that disintegrated.

The most significant victim of the crash was the ability of the U.S. economy to “close the global loop.” It was no longer able to continue recycling the world’s surpluses in the same manner.

Until 2008, the recycling had worked quite beautifully. On the one hand, it had provided the demand that the globe’s key net exporters needed. On the other hand, it had kept regenerating America’s economic vitality, although rendering its increasing deficits ever more precarious. But they were sustainable, which was key.

Now, we live in a very different world. The U.S. budget deficit has hit new highs, but its deficits are no longer capable of keeping the global flow of goods and profits balanced.

In this post-2008 world, the United States is sucking in 24% fewer net imports from the rest of the world. It also attracts 57% less capital into its private sector compared to what would have been the case had Wall Street not collapsed in 2008.

The world as we have known it since 1945 has come to a sudden end. For six decades, the United States had generated the demand that allowed the world’s exporters to worry solely about the desirability of their wares. Now, Germany, Japan, China and South Korea are still showing no signs of coming to terms with this new normal.

We now live in a world in which:

• Sufficient aggregate demand can no longer be maintained by the United States or by any one single bloc
• The big exporters can no longer afford to take for granted the global demand for their goods
• There is no room for a eurozone that operates like an augmented Germany.

Germany’s economic strategy is focused on deficit reduction and plays down powerful recessionary headwinds. In fact, Europe’s dominant economy has relied for too long on the United States’ acting as an overprotective parent.

That is why U.S. officials are trying to convince Germany that the Europeans now live in a more unforgiving world. In that world, Europe’s policies must actively create (in cooperation with the United States, China and the other BRICs) the effective demand on which our shared prosperity depends.

The underlying lesson is simple. However desirable an economy’s manufactures may be, whatever the technological sophistication of its products and regardless of the cost efficiency of its industry in manufacturing them, there exists no guarantee of sufficient demand for them.

In other words: It’s demand, stupid! Creating that demand is not the desire of some consumption-craved American consumers. It is the elixir on which the global economy — and, yes, civilization itself — is running.

That’s a hard fact to appreciate but one that, in the end, even the Germans can’t dispute.