November 1, 2013

THERE ARE many unfortunate consequences of the revelation that the National Security Agency (NSA) has been tapping the cellphone of German Chancellor Angela Merkel. Among them is that it poisons the atmosphere surrounding other pressing issues, especially transatlantic economic issues. As a new Treasury Department report made clear, the United States has much to discuss with Germany — especially the latter’s huge, persistent trade surplus, which the United States would like Berlin to reduce on the sound theory that it hinders Europe’s recovery and, by extension, global growth.

What’s at stake here is “rebalancing” — a more sustainable flow of investment and goods for the world than the existing one, which depends heavily on U.S. demand for goods from exporters such as China and Germany. Over time, the United States needs to shrink its trade deficits, and others need to shrink their surpluses. As it happens, China has quietly been moving in the right direction; its surplus is down from 10 percent of gross domestic product in 2007 to 2.5 percent in the first half of this year, according to the Treasury report. Its currency has appreciated somewhat, too. China is still overly dependent on investment and exports, but not quite as mercantilist as it was even five years ago.

Germany, by contrast, clings fiercely to export-led growth; its surplus exceeded 7 percent of GDP in the first half of 2013, near the previous record of 7.5 percent set in 2007. In nominal dollars, Germany’s 2012 current account surplus was actually larger than China’s, according to the World Bank. Germans take justifiable pride in their highly competitive industries; their focus on foreign markets is needed to offset an aging, and hence shrinking, internal population. Still, the single-minded pursuit of exports is becoming counterproductive for the rest of the world and, ultimately, for Germany itself.

On Thursday, Berlin rejected such criticism as “incomprehensible.” It’s anything but. As the Treasury report explained: “Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy.” In other words, the problem in Europe is not only German-prescribed austerity in Spain, Italy and the rest, but also German-prescribed austerity in Germany.

By singling out the Germans in a semi-annual report usually critical of China’s currency policies, Treasury is sending a much-needed signal that both Germans and their trading partners would benefit if the country, in effect, enjoyed more of its hard-earned wealth — instead of hoarding it and insisting that others do the same. In that sense, Treasury’s admonition was well-timed because Ms. Merkel is negotiating a new coalition government with Germany’s Social Democratic Party. The Social Democrats have advocated such demand-enhancing measures as an $11.50-per-hour minimum wage and increased emphasis on growth elsewhere in Europe. If the chancellor won’t take the United States’ advice on this point, maybe she’ll listen to her fellow Germans.