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Europeans Back Trump's German Grievances

Walter Russell Mead

On at least one issue, the Trump Administration’s controversial trade policy has found some unlikely backers in Europe. After Trump’s top trade adviser Peter Navarro attacked Germany yesterday for exploiting a weak euro for trade advantages, several Europeans with similar grievances have joined the pile-on. FT:

Mr Navarro’s intervention echoed longstanding complaints in other European capitals that Berlin is undermining recovery elsewhere in the eurozone by failing to stimulate domestic demand. Matteo Renzi, Italy’s former prime minister and leader of the ruling centre-left Democratic party, seized on the remarks to reprise his frequent criticisms of German economic policies.

“The rules say that Germany’s trade surplus cannot be higher than 6 per cent (of gross domestic product), now it is about 9 per cent. This is a violation of the rules that hurts all of Europe, and weakens it to the sole benefit of our German friends,” Mr Renzi wrote. “We have often raised this officially.”

Italian opposition politicians also weighed in. Renato Brunetta, a senior lawmaker from the centre-right Forza Italia party, said: “Donald Trump is right: the surplus of the German economy is the killer of Europe, a killer that everyone knows.”

The complaint is that Germany’s approach to the euro is essentially predatory: that Germany, like China, pursues an essentially mercantilist policy based on maintaining a trade surplus by fair means or foul. In Germany as in China, the trade surplus underwrites social stability and the health of the corporate and manufacturing sectors.

How does the euro figure in? Normally a country like Germany with such a huge trade surplus (9 percent of GDP) would see its currency appreciate against others. That appreciation would drive up the price of Germany’s exports around the world, and this would gradually reduce Germany’s trade surplus.

What insulates Germany from what would otherwise be a healthy if at times stressful adjustment is the euro. The common European currency has fallen sharply against the dollar because countries like Greece, Italy, Portugal, and Spain are part of the currency union, and fears over their health and the long-term prospects of the euro reduce the value of the currency even as German exports soar. Perversely, this means that a decade of recession and austerity in much of the eurozone feeds the German boom, and the worse things are in Athens and Rome, the better they get in Frankfurt and Munich.

Germany has come to depend on an economic model that impoverishes its EU neighbors and partners; this is the flaw in the design of the euro system that has turned the euro from being the instrument of continental cohesion that its founders hope it would be to a force for division and mistrust at the heart of the EU.

In Italy, the Left and the Right are united in concern over the way German economic policy appears to condemn Italy to a long-term decline. So desperate are they for relief, that even the Donald, already a deeply unpopular figure in much of Europe, is cheered on when he raises the issue.

Meanwhile, the German model seems to be coming under pressure, judging by the way so many flagship German corporations appear to be driven to increasingly shady practices. The billions of dollars in fines levied against Deutsche Bank and the vast and still-unfolding emissions cheating scandal at Volkswagen point to a corporate establishment that finds it necessary to cut corners in order to prosper.

As successful as Germany is these days, it faces huge pressures. While the United States and other countries have been coping with the social strains of post-industrial society and beginning to develop institutions and ideas that can handle the problems of the 21st century, Germany has focused its efforts on preserving its version of the blue social model even as it undertook the titanic task of rehabilitating the former East Germany.

If Germany had to compete on a fair international playing field—if Germany’s exports were priced in a currency that truly reflected the fundamentals of the German economy—the healthy trade surplus that funds the German social model would soon shrink, and German society would face the kinds of pressures and fissures that other advanced industrial economies have had to learn to live with.

Even with the euro advantage, the future for the German model is not as robust as many Germans want to think. China and other Asian countries have every intention of moving up the value chain, competing with German high tech and high quality products in more and more markets. The high energy and labor costs that the German mode requires (with aggressive environmentalists piling high energy costs on top of the high wage and social benefit costs from the labor movement) makes the economy increasingly vulnerable to a variety of international pressures.

For the United States, this creates some difficult foreign policy choices. On the one hand, a stable and prosperous Germany offers a badly needed anchor in an increasingly unstable Europe. And, as many note, without a close relationship with Germany, it is hard for the United States to do much about Putin’s attack on the post-Cold War order in Europe and the Middle East. But at the same time, Germany’s stability rests on unsustainable foundations; it comes at the price of an increasingly unstable and divided EU.

The ideal U.S. policy toward Europe would involve trying to create a deep partnership with Germany and the other leading EU members while simultaneously pressing Germany and the EU for reforms that could put the EU back on a more stable footing. That kind of policy would be difficult to pull off by any U.S. administration, and it was certainly beyond anything the Obama Administration was willing to try.

The Obama approach was to ignore the widening cracks in the foundations of Europe and to try to coordinate with an unreformed Germany against Russia; with the Trump Administration’s focus on trade deficits, it is likely to be more willing to confront Germany than Obama was. The question is whether the Trump team will develop a constructive vision for a revived transatlantic partnership even as it takes on the trade issues. The early signs are less than encouraging, though with the new team still at a relatively early stage of formation, it is much too early to say where the Administration’s thinking will go.

In Brussels the Eurocrats are worried that Donald Trump is an enemy of the European Union along with Putin and ISIS. Many of Trump’s criticisms of the EU are inaccurate and wrong-headed, but in taking on the destructive consequences of Germany’s export economy, the Trump Administration has a real point. Whether that point can be incorporated into a serious vision for a revival of the West remains to be seen; the instinctive contempt which many in Trump world have for the EU must at some point encounter the reality that the Trump worldview—of an America threatened by extremist jihadi violence and a rising and aggressive China—rather strongly suggests that the United States should be building rather than undermining alliances.

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