Is Germany Tied to China's Recovery?

by Eyck Freymann

Der Spiegel has a long but worth-reading piece on the difficult trade relationship between Germany and China. Interesting tidbits:

Germany, more than most other Western industrialized countries, is currently tying its economic well-being to China's recovery. Trade with Beijing is the most important driving force behind the current German upswing. It also explains why economists also foresee a bright future for the German economy in the medium term.

Beijing tends to react very sensitively to any form of criticism. 

There is a growing tendency among the Chinese to blatantly demand the divulgence of industrial know-how in return for the right to do business in China.

Volkswagen, for example, now sells almost one in four of its cars in China.

The article is mainly on Germany's growing dependence on Chinese markets. China rebounded from the global recession and is back up to extremely rapid 10% annual growth. Germany's growth is up to 4%, the highest in the E.U., while the US' remains a sluggish 1.6%. David Brooks used Germany's success in the past two quarters in his last column to demonstrate why the American stimulus bill was ill-advised.

Brooks, irritatingly vague as usual, claims that Germany has weathered the storm by touching its bases. He claims, "Germany is surging, in part, because America is borrowing." The more you think about that statement, the less sense it makes. The stimulus consisted of tax cuts, aid to states, and investment on infrastructure in America.

In fact, the German economy is booming because China is now buying hundreds of billions of dollars of high-end German products. While Brooks has a point that we didn't cover all our bases (Germany still has a vibrant manufacturing sector, while the US does not), he commits a very grievous post hoc fallacy when he turns to stimulus. The Spiegel article makes it very clear that Germany's economy has bounced leaning heavily--overdependently--on China purchasing German goods.

China, you will recall, had a stimulus. A huge stimulus: $586 billion USD, or 14% of GDP. Down for a quarter or two, the Chinese threw a pile of money at domestic infrastructure and picked themselves back up to 12% annual growth while scarcely missing a beat.

Germany isn't wisely passing on Keynsian economics. They're piggybacking on Chinese stimulus.