“With a little help from my friends”

This is from Ezra Klein´s Wonkbook:

The German embrace of austerity raises an obvious question: If Southern Europe is to cut and tax, how will they grow? The German answer, put simply, is, “like we did.” Ten years ago, the Germans are quick to note, unemployment in Germany was 10 percent and structural deficits were large. Germany was called “the sick man of Europe.” They attribute their subsequent success to a series of painful reforms they made to their unemployment insurance system, their health-care sector, and other pieces of their social safety net. Many figure that if they could do it, so too can Southern Europe. In truth, it’s probably not that easy — Southern Europe doesn’t have the industrial strength that Germany does, and no longer even controls its own currency levels — but it makes sense to the man on the street.

And how did Germany (and also Finland) do it? The pictures below show the pattern very clearly. Representatives of the “Northern Kingdom” have generated robust current account surpluses since the start of the single currency. The counterpart of that were the also “strong” current account deficits in the “Middle Kingdom”, composed of the large countries of the “south”, and in the Southern Kingdom”.

The “sudden stop” that took place in 2008 put an end to the “dream”.

Note that Finland went through a serious crisis in the early 1990s. In 1993 RGDP was down 10% relative to 1990! But it was “lucky” because its large neighbor, Germany, had just started running current account deficits associated with reunification. So Finland “rode the German wave”. Note also that as soon as Germany´s current account turns into surplus – an important counterpart of the “Middle and Southern Kingdom´s” deficits – Finland´s current account surplus is significantly reduced.

So yes, “like we did”, but “with a lot of help from our friends”. Now the “Northern Kingdom” has to reciprocate. But do the “German mercantilists” see it that way? I doubt it.

4 thoughts on ““With a little help from my friends”

  1. That’s overly simplistic, imho. You didn’t really prove there is a causal relationship. Germany did have a current account deficit during all of the 90s, indeed, but was that with the Eurozone nations, or rather with other EU nations, or with economies outside of Europe, most probably oil producing countries? If you want to prove a close interrelation between the exports of one nation and the imports of another, you have to dig deeper for more detailed data.

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