Germans are worrying, really

Germans are worrying (or getting mad), as showed in the last post. This time, German Chancellor Angela Merkel has voiced a solemn warning ahead of the G20 summit in Seoul this week, where she hasn't missed (or it looks like so) locating a danger not only to the world economy but also, more importantly, to Germany.

A return to trade protectionism is the greatest danger facing the global economy, German Chancellor Angela Merkel was quoted as saying on Monday.

"The greatest danger that threatens us is protectionism, and we are still not taking enough steps to ensure genuinely free trade," Merkel said in an interview with the Financial Times ahead of the Group of 20 summit in Seoul this week.

The G20 summit has been pitched as a chance for leaders of the countries that account for 85 percent of world output to prevent "currency wars" from spreading to become a rush to protectionism that could imperil the global recovery.

Merkel told the paper that China should be persuaded with "facts and figures" to set a "fair exchange rate" for its currency, the renminbi or yuan, rather than be attacked for its policy.

She also dismissed a U.S. proposal for quantified balance of payments targets as "too narrowly conceived."

"I don't think much of quantified balance of payments targets," she said.

"It is not just a question of exchange rates, but also a question of competitiveness."

Merkel's comment is, in one sense, supposed to be for all world leaders who are under enormous pressure to stimulate the economy by any means, but it underpins how fearful Germany is of protectionism for its survival.

Germany's exports have increased its share in GDP to reach over 50% in 2007-2008, mainly reflecting the worldwide housing bubble. It sank considerably in 2009 due to the near breakdown of world trade, but the current world recovery coupled with the weak euro will help sustain exports to lead to the fastest growth among the G7 advanced nations this year.

Germany's biggest problem is, however, that household consumption, still the biggest component in GDP, isn't strong enough to keep floating the economy, which has left few choices but to depend on external demand for growth. It means the more protectionism prevails in the world, the more Germany suffers. The Chancellor has a good reason to warn against protectionism.

There is more to worry: the euro. It's no doubt that the weak euro, a result of concern over heavy debtor nations like PIIGS, is the largest contributor to Germany's economic recovery so far. But happy days won't last. The Fed's quantitative monetary easing, which German Finance Minister criticizes, has recently pushed up the euro's value to a 10-month high against the dollar, casting a dark shadow over the economic outlook with exports in peril.

Statistics always has a room for any interpretation, as evidenced by the recent German output report in Reuters, a bull, and Bloomberg, a bear, both of which addressed the same number. If Japan's exports are any guide to the world economy, however, a blip in demand might be inevitable in the coming quarters. Production would have to be trimmed down to be in line with shrinking export orders. The whole economy would rapidly cool down because the ECB doesn't hide its intention to get out of the non-standard monetary policy and the government is going to slash public spending over fiscal concern.

Thus, three worries, protectionism, strong euro, and weak demand, could haunt Germany. How does Germany beat those headwind? Prescription would be to cultivate and expand domestic demand, as is the case with Japan which also remains in a chronicle pain of anemic demand within the country. It's easier said than done, though.

In a strict sense, the US is no exception for currency manipulation. How many times has Treasury Secretary Timothy Geithner touted the strong dollar policy so far? His former boss, Robert Rubin, then Treasury Secretary, was a champion of the strong dollar policy. But is Geithner now supporting it? He would not be willing to hail a strong currency given that his current boss, President Obama, plans to double US exports in five years.

Emotional knee-jerk reactions to German Finance Minister's criticism, like this or this, wouldn't attract any sympathizers outside the country. Germans have their own reasons as well as Americans. For the US to take on China, whose influence is much graver to the US than Germany, rupture in the Atlantic Ocean should be narrowed as much as possible regarding a currency matter. The US shouldn't let Germany sit on the side of China.