There is only one way to end Europe’s economic woes. Germany needs to buy more stuff.

November 15, 2013

The European Commission states the obvious: Germans need to start purchasing things. (Olivier Hoslet / European Pressphoto Agency)

There was some good news out of Brussels on Friday. The European Commission released its assessment of budget plans on the continent, evaluating the tax and spending plans for 2014 from countries from Portugal to Finland.

As is the habit, the commission plays the role of fiscal scold, telling Italy, for example, (using the unique form of English that is EU bureaucratese) that "the debt reduction benchmark in 2014 is not respected."

But Italy not having respect for its debt reduction benchmarks is old news. What is more interesting is what the commission has to say about Germany. Europe's largest economy "has made no progress in addressing the structural part of the fiscal recommendations" issued by European authorities. That may not sound like much (once again, EU-speak), but it contains some real, and important content.

The structural reforms in question are directives for Germany to orient its economy more toward domestic consumption. The nation runs persistent trade surpluses. It's great that Germany is so successful on the global marketplace. But German consumers also need to use the money those exports bring in to buy more stuff. That's why the structural reforms the commission is referring to include reducing the nation's value-added tax, which would make consumer goods in Germany cheaper.

In effect, Germany's persistent trade surpluses and weak domestic demand is the flip side of the budget and trade deficits in countries like Spain and Greece. They are two sides of the same coin: Germany doesn't consume as much as it creates, while those countries create less than they consume.

It's easy to apply a moral lens to this imbalance, and German economists, politicians and press tend to do just that. Theirs is a story of hard-working, thrifty Germans in contrast to lazy Spaniards. But this problem is really a story about math. No matter how hard-working and thrifty the Spanish might be or become, no matter how much more efficient their factories become or how well-run their businesses, they need somebody to buy that stuff. Simply put, not every country can a trade surplus. It is mathematically impossible.

And even if Germans continue to shine at making stuff, they could bring their trade flows into balance by enjoying the fruits of their labor more. Yes, Germans are hard-working and industrious and make great products -- all the more reason they should be able to import more Italian wine and take nicer Greek vacations!

They would still have a higher per-capital economic output than their southern European neighbors, but those economies would be able to produce more to satiate German demand, ending the economic depression underway along much of the Mediterranean.

That's what Ollie Rehn, the EU economics commissioner, was referring to Friday when he reportedly said in a press conference, "We have recommended [to Germany] to address these for the sake of the Germans themselves and for the euro zone in its entirety."

Throughout the euro zone crisis, the European Commission has emphasized fiscal austerity and been a prime actor pushing European nations toward tighter fiscal policy. By contrast, the International Monetary Fund, another member of the troika overseeing bailouts in Greece, Spain and Portugal, took a more measured view, taking into greater account the impact that austerity could have on growth.

That makes the commission's tough, if inscrutable, words for Germany a welcome shift. If the European economy is going to get back on track anytime soon, it will be led by people  in Germany and other financially strong northern European economies buying more stuff. The math doesn't work out any other way, and Rehn and the commission are now acknowledging that fact.

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