GREG WILPERT: Welcome to The Real News Network. I’m Greg Wilpert in Baltimore.

Indications are increasing that the US-China trade war might be leading the global economy towards a recession. One indicator of this is that Germany, which is often considered to be the economic motor of Europe, experienced an important decline in industrial production during the second quarter of 2019. It dropped by 1.5% in June, and is expected to drop another 1.5% in July because of declining orders from China. This is not yet a recession, but a technical recession, which is what happens when you have two consecutive quarters of economic contraction. The trade war between the US and China is making Chinese imports cheaper for Germany and making German exports more expensive, thus reducing the demand for German industrial products. Also, there is the fear of a no-deal Brexit now that Boris Johnson was appointed Prime Minister of the UK, and there are very low interest rates that may be creating a new financial bubble.

Joining me now to discuss the German economy in the context of the US-China trade war is Heiner Flassbeck. He’s the Director of Flassbeck-Economics, a consultancy for global macro questions. Also, he’s the former Chief of Macroeconomics and Development of the United Nations Conference on Trade and Development. Thanks for joining us again, Heiner.

HEINER FLASSBECK: Thanks for inviting me.

GREG WILPERT: Germany is known as the economic engine of Europe as I mentioned, or at the very least its industrial engine. How real do you think is the danger of recession in Germany, and would such a recession drag down the whole European Union with it?

HEINER FLASSBECK: Well, first of all, that with Germany being the engine of Europe, I have my doubts because as I’ve said many times on this program, Germany has been exploiting the other countries by exporting its way out of the crisis and exporting its way into a good recovery compared to the bad recoveries that the other European countries had. So far what we see is indeed we have a German economy that is extremely exposed to the world economy, and in particular China, you mentioned it. This is showing now in a reduction of demand from the rest of the world.

But, but, the big but is that also from Europe, demand from Europe at this moment of time is shrinking more than demand from the rest of the world. So what we have is [foreign language 00:02:32], European [foreign language 00:02:33], a weakness of Europe for a really long time because Europe is struggling with this super competitive Germany and is pushing down wages. We have with this low wage increases in the last 10 years, more or less, we have very weak domestic demand. That is why any reduction from export, any shock from the export side, is immediately driving or getting the European economy off track.

GREG WILPERT: When you mentioned the more general European context of the German economy, it sounds like you’re discounting perhaps the role that the US-China trade war and the devaluation of the Chinese yuan are playing in the economic problems that Germany is currently facing. Is that correct, or what role exactly do you see the trade war playing for Germany and more generally for the global economy?

HEINER FLASSBECK: Well, everybody says the trade war is the main thing. I have my doubts it is the main thing. It’s surely adding to the uncertainty around the world, including the Chinese small depreciation that happened a couple of days ago when the US called it a “currency manipulator,” which is a big word for a little thing. But overall the Chinese position, the competitive position, hasn’t changed very much. If you look at the real effective exchange rate, and that is the only reliable measure for competitiveness. That is, the competitiveness compared to all the trading partners of the country, including the exchange rate and including the inflation differentials or unit labor cost differentials. Then you see that China is still at a very high level.

Europe on the other hand, has a very low level, and US also is on a quite high level. So the point is still, that I’ve been making also many times, that Europe is still a little undervalued. Europe is definitely more undervalued than China, and so far the focus of Mr. Trump on China and the fist-fight, his in-fight with China, is very irrational. It should focus more on Europe. Europe is the bigger thing worldwide. Although the bilateral relations – in the bilateral relation, China is more important than Europe. But for the world as a whole, and this is what really counts and not the bilateral relationships, what really counts is the global picture. There, Europe is in a dangerous situation. Then you see in addition to all this, to our dependence on exports, the German dependence on exports, we see all over Europe, except for the monetary policy – it’s quite stupid, it’s quite stupid policy reactions in particular on the fiscal side.

GREG WILPERT: Well, I want to get to that point in a moment, but first I’d like to ask you about something you just said, which is, you said that Europe is being undervalued, and that Trump ought to be focusing on Europe. I mean I want you to explain, “What do you mean by that?”

HEINER FLASSBECK: Well, Germany still has an extremely high current account surplus. The valuation, again, the real effective exchange rate of the Euro is rather low compared to many years before. So far, if there is a competitive advantage in this world that a big region has against other regions, then it’s Europe against the United States. So far the Trump complaints about the German surplus, he said, “The Germans are bad, very bad,” it’s not fully unsound. It has its justification, and indeed what we should see in Europe is a much stronger focus all over Europe on domestic demand.

Europe is as closed an economy as the United States. The overall export share is very low, below 20%. Only Germany has an export share of 50%, which is really unreasonable for such a big country. An export share at 50% is absurd. So Germany has the wrong structure, and mainly Germany has to change. But the point is, Germany is not doing trade policies. The trade policies are done in Brussels, and so Trump does not really know whom to address with his accusations. But as I said, Europe could solve its own problems and does not have to look permanently to the world market.

GREG WILPERT: Well, that’s exactly the next issue I want to turn to. Now, you recently published a series of articles on your website, Flassbeck-Economics, with the title, “The Great Paradox: Liberalism Destroys the Market Economy.” Now we don’t have enough time to delve into all of your argument in detail here-

HEINER FLASSBECK: Unfortunately.

GREG WILPERT: … but I’d like to get the general gist of it and look at how it relates to the economic situation today. That is, your articles look at how liberalism, or what would some would call “neoliberalism”, contributes to the continuous slowing economic growth ever since the 1970s. Now, how does economic liberalism relate to Germany’s and Europe’s economic problems?

HEINER FLASSBECK: Well, to make a long story rather short, the point is rather trivial. The point is that under the neoliberal hegemony in the last 30 years, it began in the 70s. More than 30 years, it’s close to 50 years now, the market economy turned into something quite strange. Namely, a system where the company sector does not play the role that it should play in a market economy, which is to be the main investor and to be the main debtor. This combination to be investor and debtor is long gone. In most of our economies, including the United States, it’s gone for 15 years or 20 years even, so that we are faced with the situation that people save.

People still continue to save. Private households are saving money, but also the company sector is saving money. So in this situation, it is impossible that a market economy can function because the only way out then is you need someone who takes on debt. You need someone who invests these savings or the money that is needed to compensate for the demand restriction, demand fall that comes from the savings, so who’s going to do that? The only guy around for the whole world is obviously the government. The only guy around for big regions like the United States and Europe is the government. Only the Germans have found a nice solution with their export surpluses, so they ask other countries to be the debtor so that they are out of the trouble.

But that is obviously not a solution for the world and it’s not a solution for Europe. So Europe has to accept that fiscal policy must play a much stronger role, as it does in the United States. United States claims to be the best market economy in the world, but who is the demander so to say, the investor of last resort? It’s the government. Look at your figures. The figures are dramatic. In European terms they’re dramatic. They’re not dramatic in objective economic terms, but in European terms they are dramatic. More than 4% current deficit. More than 1,000 billion in the next fiscal year. Close to 800 billion last fiscal year. So in Europe everybody would say, “This economy is going to collapse. The government is bankrupt and we need other countries to finance the government.”

So far, the Europeans have to learn the lesson that neoliberalism has taken out the dynamics of investment, of private investment in the market economy, and there’s only one institution that can replace private investment and private dynamics. That is the government. That is the transformation of the whole economy that has taken place in the last 50 years. The only region in the world that is not accepting it are the Europeans. And this is the big failure and this is a big problem.

GREG WILPERT: Well, I think that’s a very interesting and very important point. Although I would also perhaps point out that it’s important to keep in mind that the US deficit is to a large extent also based on a fairly low taxation rate, and extremely high spending rate on military expenditures. Half of the budget going towards the military, which is obviously not necessarily the solution, but which some people have called “Military Keynesianism.” Wouldn’t you agree ?

HEINER FLASSBECK: That is right. It’s not a solution in the long term, but in the short term the market doesn’t care where the demand comes from. Does it come from the government military sector, or the government private sector, the government investment sector? Nobody cares. That is the simple point. To solve the problems of the moment, you need the demand. And where the demand is coming from is not the first question. It’s only the second or third question. In Europe there is no demand at all, and that is the biggest problem that you can have. I do not defend Trump’s tax reduction. That was stupid. In a situation where when the company sector is a net saver, to reduce the taxes for the company sector is really absurd. But the United States showed that it’s nevertheless possible, despite all these errors, despite these foolish policies, it is possible to have an ongoing recovery, and the unemployment rate is low. There is no doubt about it.

GREG WILPERT: Well, we’re going to leave it there for now, but I hope we will have you back on very soon.

HEINER FLASSBECK: Sure.

GREG WILPERT: I was speaking to Heiner Flassbeck, Director of Flassbeck-Economics. Thanks again, Heiner, for having joined us today.

HEINER FLASSBECK: Bye-bye. Thanks for having me.

GREG WILPERT: And thank you for joining The Real News Network.

New Jobs in the military? (US role model? again? hope not)