Earlier this week Chancellor Angela Merkel of Germany called for efforts to achieve global economic “sustainability.” This is simultaneously predictable, disingenuous, and potentially revolutionary.
The predictable part, of course, is that the Germans – second, I believe, only to the French among industrialized countries – thoroughly hate change. Sicherheit and Ruhe (security and calm) are among the most beloved words in the language. In contrast to us crazy Americans, who seem to put up with the bust phase of boom-and-bust cycles because we get so high on the boom times, the chronically pessimistic Germans have never embraced the headier aspects of economic freedom, preferring instead to stick with a steady-as-you-go strategy. Lovers of Sicherheit and Ruhe eschew change, which tends to involve risk and upheaval.
There’s something to be said for this, of course, especially seen from the perspective of a deep and persistent recession such as the one we find ourselves in now. Even if boom-and-bust cycles come in perfectly symmetrical sine wave form, those of us in finance understand perfectly well that the pain associated with a certain magnitude of loss is significantly greater than the joy associated with the same magnitude of gain. Moreover, because we all have a tendency to ratchet our expectations upward rather than emotionally accept the fact that certain gains may be ephemeral, we routinely position ourselves for emotional loss in additional financial loss during the down cycles of the economy.
That acknowledged, there is also an element of disingenuousness in Ms. Merkel’s comments. For quite a long time now the Germans have achieved economic prosperity in the same way that the Chinese have, i.e., on the backs of the American (and other foreign – but mostly American) consumer. Almost half (49%) of Germany’s economy is based on exports, so when other nations – and particularly the US – catch an economic cold and stop buying, the German economy catches pneumonia, resulting in a disruption of the steady Eddie demand that has supported German economic prosperity since the end of WWII.
Predictably, the Germans don’t like such disruptions and are calling for more global economic Sicherheit and Ruhe. What is disingenuous, however, is the fact that a good part of a potential solution lies within Germany’s power itself, namely, the power to transition their economy into one that includes a more balanced component of domestic demand. Oddly, Ms. Merkel purports to be doing this, “Germany has made an enormous contribution [to the solution of the world economic crisis], between two fiscal stimulus packages and the automatic stabilizers. With that, Germany is doing its part to overcome this international crisis. … We have done everything we could to prevent our domestic demand from slumping.” Yet what she is referring to here is only the domestic demand that makes up the other 51% of the German economy. She is not talking about achieving the kind of sustainability that would result from a world trade regime in which countries sold to each other about as much as they bought from each other, thereby resulting in true equilibrium.
Ms. Merkel in fact acknowledges that, taken as a whole, the German economy even now continues to export more than it imports. “Our current-account surplus will be around 170 billion euros lower this year than last year. With that we’re making a significant contribution to strengthening global economic activity.” In other words, we’re not going to over-export by as much this year. Aren’t you proud of us? In the long term, however, it isn’t clear that less bad is truly good enough to achieve global economic stability.
Lest anyone think that I don’t have any criticism for my fellow Americans, however, let me move on to my third point, which is true economic sustainability. Just as significant, long-term imbalances between imports and exports (selling and buying, income and outflow) at the national level have been a major contributor to the current economic mess, Americans’ persistent habit of buying more than we can afford is the root cause of the problem at the family level and – in aggregate – at the national level as well. If we as individuals and as a nation understood and corrected this destructive behavior the effects would be truly revolutionary.
They would also be painful in the short term, which is why we Americans are so very reluctant to change our behavior, just as our German friends are reluctant to change theirs. Change is difficult. Yet, unfortunately, avoiding necessary change today usually turns out to require even-more-painful change sometime in the future. The longer we wait to acknowledge that we need to change the longer and more difficult the process of change is going to be. I suspect that I will write much more on this topic in future posts, but for now let me leave you with two pieces of advice from former GE CEO Jack Welch that I’ve always considered to be very wise:
“Accept the world as it is, not as you’d like it to be.”
“Change before you have to.”
