People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 46

November 17, 2013

The War of Words between the US and Germany

Prabhat Patnaik


ADVANCED capitalist country governments, no matter what their differences, generally put up a common front. They do not attack one another in public. It was surprising therefore when recently the United States attacked German economic policy in an official document and the German government replied in kind. It showed the kind of desperation to which advanced capitalist countries are getting pushed these days by the persistence of the global economic crisis.


The United States of course has made an art of speaking untruths, but because it is badly hit by the crisis, it spoke the truth for a change this time. It accused Germany, which has a current account surplus on its balance of payments, of not doing enough to revive its domestic demand, and therefore shirking its responsibility in the matter of reviving the world economy. To see the sense behind this accusation a simple numerical example will be useful.


Suppose there are two countries A and B in the world, each of which has an output of 80; A absorbs 60 out of this 80 domestically and exports 20 to B without (for simplicity) importing anything in return. It therefore has a current account surplus of 20 vis-a-vis B. Correspondingly B has a current account deficit of 20 vis-a-vis A, which means that it absorbs 100 while producing only 80. Now, if A increased its domestic absorption by 20, and if its domestic output could not be increased much (since it was close to full capacity), then it would have to meet the expanded domestic absorption by reducing its exports. In such a case in B, to meet the same level of its domestic absorption as before, 20 more output would have to be produced as a consequence. But as 20 more output was produced in B, this would increase consumption within B further, and hence output and employment still further. The total increase in B’s output therefore would be some multiple, greater than 1, of 20. (In fact, one can be quite precise: if the consumption to income ratio in B is, say, 2/3, then the total increase in output in B because of the reduction in exports from A by 20 would be 60, of which 20 would merely replace previous import and 40 would be additional consumption).


A’s increase in domestic absorption therefore kills three birds with one stone: first, it increases B’s output (and employment) by several times this increase in absorption without reducing A’s own output, which means that it increases world employment and output. Secondly, A’s own population is better off compared to earlier, since A produces the same output as earlier but absorbs more of it, which means that its domestic consumption goes up. Thirdly, by expanding its domestic absorption A’s current account surplus falls to zero as does the current account deficit of B, which means that world imbalances get eliminated.


But if B tried to increase its domestic absorption by 20, then, even though this would bring about under the assumptions of our example, an output increase of 60 as in the previous case, it does nothing to eliminate current imbalances. It always makes sense therefore to have a surplus country (in our example A) undertaking an increase in domestic absorption as a means of eliminating global imbalances. The alternative way of eliminating imbalances is for the deficit country to undertake a contraction, but this increases world unemployment.


It is for this reason that John Maynard Keynes, when he was involved with the setting up of the Bretton Woods system after the second world war along with Harry White of the United States, had wanted the new system to incorporate some element of compulsion on the surplus countries to undertake expansion in domestic absorption, and not just on the deficit countries to undertake contraction in domestic absorption, for eliminating  global imbalances. But this was vetoed by the US which, at that time, was a surplus country, and did not want to be coerced into eliminating this surplus. So the Bretton Woods system did not have any provision of the sort Keynes had wanted, and to this day international arrangements lack any such provision.




 But, it may be asked, if the surplus country’s undertaking an expansion in domestic absorption brings such palpable benefits to its own population (assuming of course that this expansion takes the form of larger government expenditure financing transfer payments to the people at large), as well as to the rest of the world, then why does it not do so anyway, whether or not there is any compulsion on it for doing so, or whether any such compulsion is written into the international financial arrangements? And this is where we come to the crux of the issue.


A current account surplus means a build-up of claims on the rest of the world; it is an accretion of national power vis-a-vis other countries. On the other hand, an elimination of such a surplus by greater domestic absorption, through greater consumption by the country’s population, while it keeps capitalists’ profits unchanged (since a fiscal deficit of 20 for financing transfer payments to the people merely substitutes a current account surplus of 20), is disliked by them for a different reason, namely that any improvement in the welfare of the people, which includes the workers, increases over time the bargaining strength of the workers. Hence between holding increasing amounts of claims on other nations, and improving the conditions of the domestic working population, capitalists invariably prefer the former. This strategy, as we shall see, can, with justification, be called “neo-mercantilist”; but it is not necessarily expressive of bourgeois “nationalism” in today’s context, as mercantilism was generally considered to be.


The old mercantilist writers who had preceded Adam Smith had advocated that a country should always try to run export surpluses. Such surpluses, they had argued, brought gold into the country, as the means of settlement; a persistent surplus meant therefore an accumulation of larger and larger amounts of gold, which they saw as constituting the wealth of a nation. The tendency of countries in recent times of preferring current account surpluses to an expansion of domestic absorption via a better living standard for the working population, can therefore be called neo-mercantilism. Germany in this sense is exhibiting neo-mercantilism, as was the United States itself, when it opposed the attempt to have an institutional restriction on such preference during the Bretton Woods negotiations, at a time it was running a current account surplus.


German neo-mercantilism has been criticised, not only by the US but by others too for an additional reason. Germany is part of the European Union which has a common currency, a single central bank, and free mobility of goods, capital and labour across countries. The European Union in other words is supposed to have overcome nationalism and national divisions. This is universally claimed, including by much of the European Left, as its outstanding achievement, namely that in a continent which had been torn apart by two world wars, most countries now are willing to obliterate their national boundaries. But within this European Union while Greece, Spain, Portugal, Ireland and several other countries are running current account deficits on their balance of payments, for meeting which they have to borrow from financial markets and accept harsh austerity measures for doing so, Germany continues to run a current account surplus. (The current account for the EU as a whole was more or less balanced for long, but of late there has been an overall deficit because of a widening of southern Europe’s current account deficit).




Now, if Germany increased its domestic absorption, then, no matter what impact it had on the US economy, it would certainly expand demand within Europe, in which case the current account deficit of the hard-pressed European countries would come down. This would mean killing numerous birds with one stone, many more than in the example cited earlier. This is because, apart from all the points mentioned there, the European Union, which is currently tottering, would get strengthened (and a solid step would be taken towards realizing the dream of burying Europe’s fascist past); and in addition some of the poorest and extraordinarily hard-pressed people in Europe would witness an improvement in their living standard. What is more, Germany would be doing all this not by providing any direct help to people of other countries, but merely by improving the living standards of the German people themselves.


But Germany does not do this because capitalism does not allow it. At first sight, Germany’s not increasing domestic absorption but running a current account deficit appears to be an outcome of German nationalism. And this is what the US is implicitly accusing Germany of. But in fact it is the outcome of capitalism itself, in particular of the hegemony of finance.


If the US demand that Germany should increase its domestic absorption is acceded to, then it would entail not only an expansion in the German fiscal deficit, but an expansion incurred for the purpose of financing greater transfer payments to the people. This is a course that is opposed everywhere by international finance capital and runs contrary to the very logic of neo-liberalism which international finance capital propounds.


Thus it may appear that the European supra-nation is sacrificed for the sake of the “German nation”, and that the German people too are sacrificed for the “German nation”. But this is a mistaken impression because the “sacrifice” results not necessarily from any old-fashioned “nationalism” but from the very modus operandi of international finance capital, which everywhere creates divisions between the rich and the poor: between rich Germany and poor Europe, and between the corporate-financial elite in rich Germany and its working people. The fact that these divisions appear to take the hue of “nationalism” must not mislead anyone into ignoring the role of international finance capital in causing them.


The United States in short is hoist with its own petard. It has been the arch promoter of international finance capital, but the way of working of international finance capital hurts the US economy itself, for which it mistakenly blames German nationalism.