German Economic Growth and European Discontent

German exports grew 17.1 percent in the first six months of 2010 compared to the same period in 2009, according to figures released Sept. 14 by Germany's Federal Statistical Office. The export growth was driven largely by demand from developing countries, with exports to Brazil up 61.4 percent, to China up 55.5 percent and to Turkey up 38.8 percent in the first half of 2010. In comparison, exports to fellow EU member states increased by only 12 percent. The EU Commission estimates German economic growth at 3.4 percent of gross domestic product (GDP), more than double the projected eurozone average of 1.7 percent. When considered along with its increasing trade with the developing world, Germany's growth could reignite the long-simmering tensions between Berlin and fellow eurozone member states over Germany's conflicted interests: its own economic well-being and its dedication to the European project. These tensions flared earlier in 2010 over the Greek debt crisis and have the potential to expand into political fissures between not only Berlin and the most troubled members of the eurozone but also between Germany and France, the partnership that arrested the debt crisis. News of Germany's export prowess in the first half of 2010 came only a day after the European Commission released its interim fall economic forecast on Sept. 13. Both reports highlight just how much the German economy has outperformed its eurozone and EU peers. Germany's economic growth is in no small part related to its robust export growth, since exports account for roughly 45 percent of Germany's GDP. (click here to enlarge image) The more fundamental issue for the rest of the eurozone, however, is that this export growth and thus Germany's economic rebound is largely driven by increased trade with the developing world — in both exports to and imports from non-EU countries. German imports of Chinese goods were up 35.6 percent in the first half of 2010, helping China overtake the Netherlands as the largest supplier of goods to Germany. No doubt, increased imports from China are a function of shifting German consumer — and industry — demands for lower-priced goods as economic uncertainty continues. Germany's eurozone partners, however, will take issue with this shift. German economic and export growth in the face of continuing economic uncertainty in the eurozone exposes the fundamental divergence in the economies of northern and southern Europe. The productive Germany is tied via the euro currency union to countries that have lower productivity rates and inefficient economies. This union is beneficial to southern Europe insofar as it provides southern countries access to cheap credit, but due to challenges endemic to these countries (corruption, non-transparent banking systems, large social welfare outlays, overreliance on the real estate and construction industries for recent economic growth and lack of manufacturing capacity), credit and capital are inevitably misallocated, leading to bubbles, excessive government spending or both. The divergence between the productive North and inefficient South was on full display as the Greek sovereign debt crisis unraveled in early 2010. To resolve the bloated budget deficits of the South — and as an assurance that it would not have to bail out every southern country like Greece — Berlin has demanded these countries implement severe budget cuts and that southern European countries begin implementing German-style labor market and public sector reform. However, not all European countries are enthused about making their economies more like Germany's. French Finance Minister Christine Lagarde spoke out against the German economic model in March 2010 — at the height of the eurozone crisis — complaining that the German economic growth of the 2000s was not coupled with a rise in German demand for eurozone goods, which would boost economies in the South. The argument by Lagarde and by southern Europe in general is that Germany does very little to buy goods from the most troubled eurozone states and that the euro currency union overwhelmingly benefits Germany because it prevents member states from engaging in competitive devaluations of their otherwise national currencies. Whether the argument is economically sound or not, it carries plenty of political weight, particularly in the current climate. Certainly, a case could be (and most likely will be) made by politicians in Greece, Italy and Spain that Germany was increasing imports from China when its eurozone neighbors were suffering next door. Furthermore, September will see eurozone countries pass 2011 budgets with significant spending cuts and begin implementing austerity measures they had decided upon over the summer. Most of these cuts and austerity measures have been implicitly — and in some cases, like in Greece, Spain and Portugal, explicitly — demanded by Berlin. With the austerity measures extremely unpopular, governments across the eurozone will find it difficult to hold the line against rising public discontent. This will become particularly politically unpalatable as the German economy booms while politicians across the rest of Europe are left to implement what are considered "made in Germany" budget cuts. It is difficult to say what impact anti-German populist rhetoric or cutting back on budget cuts may have. Madrid went back on 500 million euro ($649 million) in infrastructural budget cuts with few repercussions. But going forward, the Club Med countries (Italy, Spain, Portugal and Greece) may be reluctant to undo the budget cuts out of fear of drawing Germany's ire, potentially threatening their access to the implicitly German-controlled 440 billion euro safety net of the European Financial Stability Fund. The most serious potential problem is that Germany's growth and increasing trade with the developing world could begin to insert a political wedge between Paris and Berlin. After all, it was a French official, Lagarde, who voiced the loudest complaint about German trade patterns. Other than that statement, France had largely toed the German line throughout the 2010 eurozone crisis, which has allowed the crisis to be halted, at least for now. But as France's 2012 presidential election draws closer and French President Nicolas Sarkozy's approval ratings remain low — and unlikely to rise significantly as the German-backed austerity measures are implemented — Europe may face a crisis of leadership if Paris decides make an issue of Germany's economic outperformance amid the eurozone's lingering troubles.