Davies discusses one vigorous striking sentence in Brad's post
Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.Davies writes
I’ve considered it, and I think the answer is actually “more or less the same”.The "any" in "wouldn’t have necessarily done any worse worse" is clearly rhetorical hyperbole .
Looking at the actual current account of Switzerland suggests that a Germany which had fixed to CHF wouldn’t have necessarily done any worse …
And the story of the 00s in German exporting (the 90s, of course, were when Germany ran quite sizeable deficits) is one of the bilateral trade between Germany and China. German industry makes “the thing that makes the thing that makes the thing”, notoriously, which makes its exports very price-insensitive to a country like China, which has a huge export market for things, which ensures a massive domestic market for thing-making things, and a consequent import demand for thing-making-thing-making things.
Davies convinces me that Brad's focus on the export sector was unfortunate. I would ask what the state of Germany's current account would be. Even if German exports were totally price insensitive, Germany can import more. If Germans had spent the money they get from China on Mediterranean goods and services rather than lending it to Mediterraneans, things would be different.
> Germany was very good at making things which make things which make things back in the 90s when they had a current account deficit. World wide demand for such things has not growth extraordinarily (it doesn't matter for the German export sector whether they export to China or some other country). Also, German firms were building factories in other countries to avoid paying the enormous German real wages. The equipment making technology is German, but the production doesn't have to be. Germany's strength in this sector doesn't make total German exports insensitive to real exchange rates and has no effect on imports -- it is a statement about the level of exports not the slope of net exports/GDP as a function of exchange rates.
Davies also wrote
Everyone wants to find a version of history under which all the problems of the Eurozone are Germany’s fault, because everyone knows that all the solutions involve Germany paying. But it’s not really true; Germany spent the early years of ERM/EMU paying far more than anyone else was prepared to in order to smooth the adjustment path for the former Communist states. And after fifty years of structuring everything in Europe to prevent German hegemony, is it really a big surprise that Germany isn’t well set up to act as a hegemon? Imagine if the USA had lost the war in the Pacific and was today being blamed for its failure to ensure the economic development of the Phillippines.Here both "all"s in the first sentence are, again, hyperbolic. I would say that the Eurozone has two huge problems. One is that Greece has debts it can't and won't repay. The other is that aggregate demand is too low. One perfectly fine solution to the aggregate demand problem would be for Germany taxpayers to grit their teeth and accept a tax cut. This would stimulate German demand including demand for imports. If Germans were feeling incredibly generous, they might also consider accepting an increase in wages. What the Euroblock needs most is higher aggregate demand -- self indulgence, the illusion of wealth of those who think government bonds are net wealth and all that. What we need is less German self sacrifice not more.
There is nothing about the efforts to prevent German hegemony which would interfere with this policy. It is banned by rules which the German government demanded.
Even on Greek debt, Germany isn't the only Euroblock country which won't get its money back, and they won't get their money back no matter what (even with flows discounted at an interest rate far below market rates). The debate on debt is over how long the Troika should extend and pretend and how much Greeks should be punished and humiliated.
Finally I think that, while the DeLong Davies debate is brilliant, it is tainted by mixing economics and moralism. German's huge contributions to smooth the adjustment path for former Communist states were very admirable, but they are not affect the currently optimal German budget deficit.