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U.S. Blasts Germany's Economic Policies
By Ian Talley and Jeffrey Sparshott
Updated Oct. 31, 2013 4:15 a.m. ET
In its semiannual currency report, the Treasury Department identified Germany's export-led growth model as a major factor responsible for the 17-nation currency bloc's weak recovery. The U.S. identified Germany ahead of its traditional target, China, and the most-recent perceived problem country, Japan, in the "key findings" section of the report.
The U.S. is itself dealing with persistently weak growth and has faced complaints from some countries about its attempts at reviving a sluggish economy, including the Federal Reserve's easy money policies. Finance leaders have also taken aim at the U.S. over the global economic impact of fiscal wrangling between the White House and Congress, including the government shutdown and debt-ceiling fight.
With the latest report, the Treasury Department has now criticized the world's three largest economies after the U.S. for their economic policies.
The focus on Germany represents a stark shift in the Obama administration's economic engagement with one of its most important allies. Since the early stages of the euro-zone debt crisis in 2010, U.S. officials often avoided public criticism of Germany given its central role in keeping the currency bloc intact. President Barack Obama and his top officials worked carefully behind the scenes to prod Germany without antagonizing it publicly.
The currency report comes at a time when officials in Berlin and Washington are already clashing over other issues including allegations about U.S. spying.
"Germany's anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment," Treasury said in its report. "The net result has been a deflationary bias for the euro area as well as for the world economy."
A spokesman for the German finance ministry said international organizations including the International Monetary Fund, Organization for Economic Cooperation and Development and European Commission have recently evaluated Germany's economic policies favorably. The IMF found no policy distortions, the spokesman said. Strong domestic demand is driving Germany's growth, he added.
The IMF, however, has consistently urged Germany to boost domestic demand, saying its large trade surplus came at the expense of its southern peers.
Some critics have called Treasury's assessments toothless, pointing to the fact that no major trading partner has been labeled a currency manipulator in nearly two decades. Still, the U.S. has employed the report as a diplomatic tool to sway countries over their economic and trade policies.
The complaints about Germany's economic model aired in the report are well-known and have been conveyed quietly by U.S. officials over the years. The latest venue for the comments were unusual, however, in a report that typically focuses on currencies rather than broader economic policies.
The euro, in fact, has strengthened 4% this year due to rising investor confidence in the currency union's recovery and signs that the Federal Reserve is on course to continue its extraordinary easy-money policies. The euro, which settled at $1.3736 at 5 p.m. in New York, fell slightly in late trading after the Treasury released the report Wednesday evening.
A stronger euro helps the U.S. economy by making American products more competitive abroad. But U.S. officials appear to be more worried about German economic policies creating longer-run distortions in the global economy.
As Germany helps define economic policy for the rest of the euro zone, Washington wants to ensure the euro zone doesn't rely too heavily on exports—rather than domestic demand—to pull itself out of its economic doldrums.
The Obama administration heightened its criticism of Germany markedly from April, when the last currency report was released. At the time, the Treasury broadly noted that Germany and the Netherlands maintained large trade surpluses and briefly mentioned a shortfall in demand within Europe. Now, the Treasury pointedly noted that Germany's surplus now exceeds China's.
Jacob Kirkegaard, an expert on the euro zone at the Peterson Institute for International Economics, said the timing of the criticism is likely an attempt to influence economic policy in Germany while a new coalition government is being formed and is debating its agenda for the next several years.
The euro zone's reliance on exports makes it more difficult for the U.S. and other countries to address their own economic problems. "The euro area is sucking demand from the rest of the world rather than making up for the declining growth in emerging markets," Mr. Kirkegaard said.
Regardless of the blunt criticism from abroad, German politicians are discussing how to boost public and business investment in the country. But there is also a widespread consensus in Germany that the country's big trade surpluses are a sign of health and competitiveness.
The U.S. Treasury's semiannual currency report is designed to ensure major trading partners aren't using their currencies to gain a competitive edge over U.S. exports, undermining the American economy. By holding down the value of its currency, a country can make its manufactured products cheaper to sell internationally.
Treasury maintained its concerns over China, Japan and South Korea's currency policies. It didn't name any country a currency manipulator.
The U.S. reiterated its criticism of Beijing, saying the Chinese government needs to allow a "significantly undervalued" yuan to appreciate faster. Geng Shuang, a spokesman for the Chinese embassy in Washington, said "there is no evidence that the Chinese currency is significantly undervalued," pointing to a 34% appreciation of the yuan against the dollar since 2005.
And while the Treasury said Japan appeared to be abiding by recent international currency agreements, it said it would continue to "closely monitor" Tokyo's policies.
Treasury also warned South Korea to limit its intervention in the currency markets.
Representatives from the Japanese and Korean embassies in Washington didn't immediately return requests for comment.
—Anton Troianovski, Marcus Walker, Sudeep Reddy and Sarah Portlock contributed to this article.
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