The Sustainability of Transatlantic Growth
In the current climate of rising populism—or what Mark Blyth calls “global Trumpism”—the United States and Germany remain key engines of the global economy. While Germany has long been admired for its export-led model, the United States is a powerhouse of household consumption. But both economies are vulnerable to problems endemic to their growth models. The ongoing euro crisis continues to pose a threat to the German model, which relies too excessively on export-led growth. In the United States, the consumption-led growth model is closely tied to the housing market, which has not been properly reformed after the global financial crisis that originated in the U.S. mortgage market. These issues raise questions about the sustainability of these growth models in the global economy.
What makes the two economies tick? In the United States, private consumption constitutes roughly 70 percent of GDP. Housing is an essential part of the U.S. growth model with important transmission effects into the broader economy. The German growth model is less dependent on consumption, constituting only 55 percent of GDP. Instead, it relies on export manufacturing and savings, with a particular focus on price stability, wage restraint, and competitiveness.
There are major risks to the sustainability of these models on both sides of the Atlantic. While Germany has dodged the euro zone crisis, other European economies have hardly recovered from it. Germany’s prescribed medicine of austerity and structural reforms did not lift up crisis-ridden economies. And European policymakers did not do enough to solve the euro zone’s deeper institutional problems. Political shocks, such as Brexit, the Italian referendum, the rise of populist and anti-euro forces, as well as the political unwillingness of adopting major institutional reforms at the European level could eventually bring down the euro zone and hurt the global economy. This makes the German export model vulnerable to declining demand from not only Europe but also other economic powerhouses, such as the United States or China.
The United States has neglected to fix its housing market worth $26 trillion, which was the source of the recent financial crisis, a major piece of “unfinished business” of financial reform. This poses an important source of global financial risk. U.S. mortgage debt is still an attractive asset to domestic and foreign investors (most notably Chinese investors). In response to the crisis, the U.S. “nationalized” parts of its housing finance market by placing the battered mortgage giants, Fannie Mae and Freddie Mac, in government control. Almost a decade later, the two mortgage giants remain in the hands of the government with an uncertain future. Taxpayers are currently on the hook for $6 trillion in mortgage debt handled by the two institutions. Importantly, regulators have already sounded the alarm citing Fannie and Freddie’s declining capital buffers and their insulation from competition and private markets. These factors could reduce investor confidence, hurt the housing market, and the broader consumption-led economy.
Reducing these vulnerabilities is a tall order, given the powerful interests entrenched in each growth model. It would therefore be unrealistic to ask either country to fundamentally switch their growth models. However, German policymakers can do more to boost domestic demand and consumption without hurting the country’s export-led success. They could increase spending on education, infrastructure, and R&D, as well as work on integrating immigrants into the labor force as a new source of demand, consumption, and growth. This would—in combination with much-needed institutional reforms at the EU level—help lift up the euro zone, which would also go on to benefit German exporters. And it would somewhat alleviate the risk of declining global demand for German exports. Similarly, the new U.S. administration should move forward with comprehensive housing finance reform, given the risks the housing market currently entails. The transatlantic and global economy will be better off if policymakers improved the sustainability of these interdependent growth models.