German makeover not needed

Who is to blame for the state of the world economy? To listen to a range of presidents, investors, pundits and finance ministers, just one country: Germany.

US President Barack Obama suggests the Germans are sending the world back into recession. George Soros says they are destroying the euro. French Finance Minister Christine Lagarde thinks they are pushing the euro area into deflation.

It is all crazy.

Germany's huge trade surplus isn't part of the problem. Handicapping the strongest link won't help the European economy. And Germany couldn't change direction now even if it wanted to. Instead of criticising the Germans, other nations should be learning from the world's second-biggest exporter. German brands such as Siemens AG, Bayerische Motoren Werke AG and Bayer AG didn't just appear for no reason.

Spending cuts

It's not hard to find people blaming the Germans for everything going wrong in the world. The country hasn't been getting this much flak since the Second World War.

Before the Group of 20 summit in Canada, Obama scolded countries cutting government debt as another recession threatened. US Treasury Secretary Timothy F. Geithner this month called for "stronger domestic demand growth" in European countries that have trade surpluses, such as Germany.

In response, German Chancellor Angela Merkel said in a speech last week she had told Obama that cutting spending is "absolutely important for us."

Billionaire investor George Soros said in a lecture last week that Germany "is the main protagonist" in the euro crisis, and the austerity plans of Europe's biggest economy may inflict deflation on the region.

That echoed a theme pushed by Lagarde in March, when she argued that Germany should cut its trade surplus to help out the nations running deficits.

The consensus seems pretty clear. If the world does slip back into recession, and if the euro collapses, it's all the fault of the Germans. Their insistence on saving money, living within their means, and getting debt under control is the greatest threat the world faces.

Upside down

There's just one snag with this analysis: It's upside down.

Germany does have a big trade surplus: It was 13.4 billion euros (Dh60 billion) in April. And it's cutting the budget deficit: Merkel aims to slice 80 billion euros from state spending, starting in 2011.

But that doesn't threaten anyone. Here's why.

First, the German trade surplus isn't what created the massive trade gaps in Greece, Spain and elsewhere in the euro area. While it is true that every surplus has to be matched by a deficit somewhere else, it doesn't follow that Germany created the black hole in Greek or Spanish finances.

In reality, the Spanish chose to base their economy on a construction boom, and the Greeks based theirs on lavish government spending. They could have created competitive, export-oriented economies. They didn't and there is no point in complaining about the countries that did.

Second, reducing the German trade surplus is the wrong solution. You might as well tell the Brazilian soccer team that it is allowed to play in the World Cup with only nine men on the field because otherwise it wouldn't be fair on everyone else. It's stupid. You can't improve the euro area's economy by telling its strongest member to weaken itself. You have to concentrate on the structural problems in the big-deficit countries. That's the only way to solve the crisis.

Third, rebalancing trade in the euro area won't work. It isn't going to happen, so what is the point of asking? The only way the German government can engineer trade deficits, as Obama, Soros and Lagarde seem to think it should, is by offering even bigger stimulus packages.

That would just make German households save more, fearing inflation and tax increases would follow. Frugality is in the national character.

The crisis of the euro won't be fixed by making Germany the scapegoat. The country runs a trade surplus because it makes lots of things that people want to buy: cars, machinery, pharmaceuticals and technical goods. The reason Germany doesn't consume as much as some economists and politicians say it should is because the people are averse to debt.

Working hard? Making great products? Living within your means? Those aren't bad principles on which to base an economy.