Europe Could Rev Up the World Economy

As the worlds largest free-trade area, the European Union can reverse its sharply slowing economic growth in the first three quarters of this year to become an important driver of global demand and output.

Such an outcome depends only on Germany and some smaller countries that account for about a third of the EU economy.

Heres a quick workout of how that process could unfold.

Imagine that Germany agreed to stop stifling the growth of its closest trade partners by deciding to generate more economic output from its huge wealth — 1.7 trillion euro of net foreign assets at the end of 2017 — accumulated with large trade surpluses.

In practical terms, that would mean the use of Germany‘s massive budget surplus of 3.2% of GDP to revive its moribund economy growing at an annual rate of 0.6% in the first nine months of this year — a pace of advance that is less than half of Germany’s potential and noninflationary growth rate.

An acceleration of German economic growth would immediately trigger an increase in German purchases of goods and services from its European trade partners, most of which are members of the continents free trade area.

Thats a significant amount of money. In the first nine months of this year, German imports from Europe came in at 563 billion euro.

The rest of the world — the source of another 265 billion euro of German imports — would benefit, too.

The U.S., in particular, would also have a chance to increase its puny $45.3 billion exports (data for the first nine months of this year) to Germany. But there would be more U.S. sales because a faster growing German economy would expand all European markets, an area that is currently taking almost a quarter of Americas total exports.

There are two questions now: (1) how important would be the impact of Germanys faster growth on its import demand？and (2) will Germany accept to stimulate its economy？

Based on the data of the last three years, the German import demand is very responsive (or elastic) with respect to GDP growth: A 1% increase in economic growth triggers a 2% increase in import demand.

That would be enough for Europe to celebrate.

But hold the champagne, or the German “Sekt,” because Germans have always steadfastly refused to change their export-driven growth model — less charitably defined as a “beggar-thy-neighbor” policy that should have no quarters in a grand project of the European economic and political union.

Yes, Germany — by far Europes largest economy — has settled to count on exports to lift itself from a deflationary quarterly growth rate of 0.1% in the year to the third quarter.

Inflated rhetoric about a political mission to change that by a new cast at the European Central Bank is hitting the wall of German warnings. Berlin is very worried about dire effects of negative interest rates, and what they see as speculative horrors of cheap money reflected in Frankfurts booming skyline, where prices of luxury real estate soared 10.3% in the year to September.

The ECB has no political mission

So, forget about the political mission migrating from an ineffective European Council (forum of heads of state and government), or from a German rubber stamp Eurogroup (a gathering of euro area finance ministers), to the sideshow of unelected technical staff at the ECB.

Germany has never feared any of those political missions. All that Berlin will eventually do is offer loans by recycling its huge net export incomes so that Europeans can continue to buy German products.

An effective political mission could only come from the U.S. But Germans expect no such thing from a country their political establishment and media ridicule in the most derogatory terms.

Why is the U.S. doing nothing to help itself and the rest of the world？ And why are the G-7 and the G-20 so useless？

The change is coming, though, with pressures from growing anti-German and euroskeptic right wing political forces in Italy and France. Ominously, that could go much beyond spelling an end to the pretension of European unity.