The New Washington Consensus? Deutschland Über Alles

Now that the annual meeting of the World Bank and IMF lies behind us, it is finally clear that a new Washington Consensus has emerged.

If you believe that new consensus, propagated by U.S. and UK policymakers and media voices, the resolution of the world economy’s current troubles overwhelmingly lies in Germany. If only stubborn and intransigent Angela Merkel and her sidekick, Wolfgang Schäuble, Germany’s finance minister, changed their position on key issues, all would be well soon with the global economy.

Seldom has the search for solutions to global problems been so focused on seeking salvation by focusing on one nation. Never mind that Germany accounts for a mere 3.66% of global GDP.

This is not to make light of the fact that the German government can be dense and intransigent at times. And now certainly is such a time. But the Germans are also more fleet-footed in making required changes once the evidence becomes overwhelming. Angela Merkel, in particular, tends to be cautious for a prolonged time. But then she acts, often with remarkable determination.

German infrastructure as a global obsession

So when we are told now that Germany is catastrophically failing to spend more on its crumbling infrastructure, as Ambrose Evans-Pritchard just dramatically wrote, rest assured that the German government will act. It’s a matter of self-interest, after all.

The world will learn faster than many of the advocates of the “It’s Germany, Stupid!” school appreciate that the German government will take a variety of measures to use its fiscal space, particularly to undertake infrastructure investments.

And since Germany is truly a country where the bureaucracy always has a lot of good plans in its drawers, the world can also rest assured that this spending will be effective and that it can be brought to bear soon, with a minimum of “boondoggle” (aka corruption) that hampers such spending elsewhere.

Germans, for their part, may be forgiven for finding this sudden attention to German infrastructure a bit “rich,” considering which voices are favoring that it spend more on this item.

The need to improve the country’s infrastructure to serve future productivity gains is certainly at least as great in the United States and the United Kingdom. And the fiscal space there is similar – and the interest rates equally low.

Imagine this: Why structural reform is for the birds

Or listen to Martin Wolf who, at an event in Washington, disputed the usefulness of structural reforms. After declaring Germany the master student of undertaking structural reform, he then asked this question: What benefit is there for other countries to engage in similar actions, given that Germany may be entering a technical recession soon, with a second quarter of GDP on a slightly declining trend?

It sounds as if Mr. Wolf, the estimable economic commentator, in his obsession with Germany, has become a true believer in the “throw out the baby with the bathwater” method.

The answer to Europe’s economic puzzle evidently lies in everybody doing what they need to do for their own nation’s long-term future. For some nations, that means the launch of irreversible structural reforms. This must be accompanied by flanking measures by others, including offering more fiscal leniency for those nations who, at long last, finally do the right thing.

Forget the German model?

Under the current charged circumstances, where many a nation (including the Germans) feel uncertain about the future direction of the world economy, one can also witness an increasingly contrived European debate about the “German model.”

I recently heard voices in Italy that dismissed for a spectacular reason whatever ideas Germany may offer on organizing a national economy. In a true display of speciousness, short-termism and escapism, all in one, they offered this insight: “Since Germany’s GDP declined in the last quarter, the country’s economy obviously can’t be regarded as a model for Italy.”

Export meister no more?

Then there are those who feel happy because Germany’s exports are stalling. Indeed, global stock markets recently took that occurrence as the key reason to sell off.

Never mind that the main reasons for this particular development – a slowdown in China and sanctions against Russia – are well understood and should have been properly discounted by the markets. And lest anybody predict this to be a long-term trend, it is safe to count on German exports rising again soon.

When that happens, the odds are that the slowdown of the world economy is going to be explained by its polar opposite: Global growth will then be declared in trouble because Germany exports too much, thus choking off the growth space (via exports) of other nations.

The lesson in all this is self-evident: The global economy does indeed face major troubles. And Germany – about 1/27th of the global economy – certainly has its forms of shortsightedness, errors and idiosyncrasies. But so does pretty much everybody else.

Improving global economic prospects – no doubt an urgent task – is a team sport. And while some have to (and can) do more than others, the idea to single out one or a few nations as being overwhelmingly responsible for all the ills of the global economy may be an interesting rhetorical proposition. But with regard to proper economic analysis, it is simply flawed.

Savor the irony

In conclusion, savor the major irony here: There was a time when the Germans indeed believed that “the essence of Germany shall cure the ills of the world.” (Of course, other nations had their own moments of megalomania as well.)

The relevant point now is that the Germans no longer believe in such supremacy. They are even too timid to act these days on the international stage. But the fact that other major Western nations’ elites now single them out as super-important to everyone else’s future – not just the Eurozone’s – is truly bizarre.