Germany Speaks Out

The Group of 20 meeting in Seoul is quickly emerging as a game-changing moment. Not only did President Barack Obama suffer a loss of face, but America’s leadership took a major hit.

Following America’s catalytic role in bringing the global economy to the brink of disaster, followed by the Obama administration’s weakened political position after the Nov. 2 mid-term elections, the United States is now losing the global argument over what is the best development model for the 21st century.

It didn’t help that Timothy Geithner, the U.S. secretary of the Treasury, came to the table with a preposterous proposal. Geithner, along with other well-known American economists, had pushed a controversial theory — namely that the recent economic collapse was caused not only by America’s Wall Street casino capitalism but also by certain global trade imbalances. In these economists’ theoretical world, if the trading surpluses don’t balance the deficits, if their spreadsheet columns don’t add up, then disaster surely awaits.

In practical terms, according to Geithner et al., that meant that countries with robust manufacturing sectors and big trade surpluses like Germany, Japan and China must increase public spending and buying things from countries like the United States with big trade deficits. Then this boost in global consumption not only would provide more electronic trinkets, big screen TVs and stylish clothes for the Germans, it also would help the world balance its trade imbalances.

That was the theory, anyway. It came from the same experts who missed an $8 trillion housing bubble in the United States, but that’s another matter.

Or is it? Surely Secretary Geithner has visited Germany and Japan and noticed that these wealthy nations are hardly lacking in material goods or modern trinkets, so what exactly are the Germans and Japanese supposed to buy more of?

China is a different story. There, about a billion poor people could use some of the things money can buy to raise their living standards. But unfortunately the Chinese authorities think it’s better to finance the U.S. budget deficit and American consumers’ profligacy rather than the welfare of their own people.

At the G-20, the Germans weren’t buying any of it, nor were many of the other 18. Instead, Chancellor Angela Merkel began lecturing back.

The United States is the one that must take the necessary steps to increase its competitiveness, she said. The U.S. should not try to put limits on countries that have figured out how to get the world to buy their goods. “In the task ahead, the benchmark has to be the countries that have been most competitive, not to reduce to the lowest common denominator,” she said. Ouch! — America being called “the lowest common denominator.”

Her finance minister, Wolfgang Schäuble, was even more blunt. He described American policy as “clueless” and said the American growth model is stuck in a deep crisis: “The U.S.A. lived off credit for too long, inflated its financial sector massively and neglected its industrial base.” Ouch again. Germany — previously sneered at by U.S. pundits for its “weak and sclerotic” economy — lecturing America about how to grow its economy.

Merkel said something else that is even more of a game changer: “It is essential to return to a sustainable growth path.” One cause of the crisis was that “we did not have sustainable growth. In many countries growth was built on debt and bubbles.”

What Merkel was saying is that the era of U.S.-style consumption-driven economics is over. The world needs to figure out how advanced economies can provide for their people without having roaring growth rates driven by asset bubbles, and how to develop in a way that is ecologically sustainable.

If consumer-driven growth was the order of the day in the post-World War II era, in the new era of Pax Germania it will be steady-state economic growth — not too fast, but not too slowly — and producing value-added products that the rest of the world wants to buy.

Utilizing more conservation and renewable energy technologies than the United States, Germany already has reduced its carbon footprint to half that of America’s — and it provides universal health care and has less inequality.

Let’s hope Obama and Geithner were listening because the world is no longer automatically following America’s lead. Will Americans, so used to thinking of themselves as the mightiest and the best, be able to adjust their attitudes to allow for the change that must occur?

Steven Hill, the author, most recently, of Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age.