Transatlantic Decoupling?

How is the United States managing to overtake the eurozone economically? And will this trend continue?

27.04.2024

The United States seems to be leaving the eurozone behind economically. In recent weeks, the leading U.S. and UK business newspapers, the Wall Street Journal (WSJ)[1] and the Financial Times (FT),[2] have focused on the widening economic gap between the western economic areas, which, according to the latest forecasts from the International Monetary Fund (IMF), is set to get even bigger in the coming year. According to the IMF, U.S. gross domestic product (GDP) will grow by 1.5% in 2024, while the eurozone is expected to grow by only 1.2%.

Link: https://exitinenglish.com/2024/04/27/transatlantic-decoupling/

And of course, these articles are accompanied by the usual hollow advice (“too much welfare state,” “too high taxes,” “too little work”) and malicious undertones that the weekly newspaper Die Zeit, for example, has complained about in its online edition.[3] Yet it was precisely this kind of spiteful discourse that was used by the German media against Southern Europe just a few years ago, at the height of the euro crisis – not least in Die Zeit itself. [4]

But why is the economic gap growing? The simple fact that the eurozone is not the currency area of a single state is certainly one thing that should be taken into account. Since the outbreak of the crisis in 2008, the eurozone has been characterized by fierce national disputes and growing socio-economic imbalances. The German core unilaterally passed on the consequences of the euro crisis to the southern periphery, the so-called “debt countries,” in the form of the Schäubler austerity dictate,[5] while Germany experienced a long, export-driven economic boom.[6] Washington was thus able to formulate a more or less consistent crisis policy, while in Brussels all crisis measures were always an expression of the intergovernmental power struggles in the eurozone.

The Gap Is Growing

However, if the economic projections for 2024 are correct, it would continue a long-term economic trend in which United States has vastly outperformed Europe in terms of economic growth over the past 15 years – although the difference between Germany and the U.S. is far smaller than the difference between Greece or Italy and the United States. According to the WSJ, citing IMF data, the European economy – measured in the world’s leading currency, the U.S. dollar – has grown by only six percent over the past 15 years, compared to about 82% growth in the U.S. GDP, which totaled about $14 trillion in the U.S. and the EU in 2008, is now more than $26 trillion in the United States – compared to just $15 trillion in Europe.

This economic divergence between the EU and the U.S. is also evident in terms of consumption and wages – another late consequence of the austerity paradigm celebrated in Germany[7] and imposed by Berlin on the highly indebted southern periphery of the eurozone during the euro crisis.[8] Fifteen years ago, on the eve of the transatlantic real estate bubble,[9] the U.S. and the EU each accounted for about a quarter of global consumer spending; today it is 28% in the United States and only 18% in the EU. Real, inflation-adjusted wages have risen by six percent west of the Atlantic since 2019, while they have shrunk in almost every EU country: from three percent in Germany, to 3.5% in Italy, to six percent in Greece.

However, this widening economic gap no longer leads to an increase in the standard of living for most wage earners – in the U.S., the decoupling of officially registered economic development from social reality has progressed much further than in the EU. The tense social situation of wage earners in the United States is reflected, for example, in the average life expectancy,[10] which has fallen to 73 years for men and 79 years for women.[11] In Europe, men can expect to live to 79 and women to 84 – and the gap has widened in recent years. The fact that almost two thirds of all U.S. citizens are now unable to build up any significant financial reserves and have to scrape by living paycheck to paycheck[12] – at a time when inflation-adjusted wages in the U.S. are said to have risen by six percent – gives us an idea of the distortions and whitewashing required to calculate the official inflation rate.

The American Advantage: Ukraine? Their Energy Source? Protectionism?

In short, we can say that the economic decoupling of the United States from the eurozone is well underway – even if wage earners west of the Atlantic are hardly benefiting from it. Beyond the pure neoliberal ideology that blames the welfare state, taxes or trade unions for Europe’s economic stagnation, the Wall Street Journal and the Financial Times also mention very real causes for the growing transatlantic divide in their articles. They cite, among other things, Washington’s increased economic spending after the outbreak of the pandemic and the U.S. high-tech sector, which has no equivalent in Europe, a region that is falling behind technologically.

The European economy is suffering much more from high energy prices than its American competitor, who can rely on cheap fossil fuels extracted through the environmentally disastrous fracking process[13] that has made the U.S. one of the world’s largest energy exporters.[14] This difference is particularly evident in inflation figures, which are consistently lower in the United States[15] than in the eurozone.[16] The Russian invasion of Ukraine also cemented the role of the U.S. as a “safe haven” for capital in times of crisis, especially since the EU does not have sufficient military capacity to conduct such imperialist conflicts on its own (a fact that has triggered the frenzied arms race in Europe).

Both newspapers also point out that the EU’s and Germany’s export orientation has become one of Europe’s main disadvantages. Until a few years ago, Europe and Germany were “massive winners from globalization,” according to the FT, but “that type of globalization” is now a thing of the past. The WSJ noted that with “cooling global trade,” Europe’s “formidable export industry” is also at an impasse. Europe’s “reliance on exports” is turning from a strength into a “weakness,” as exports account for about 50% of the EU’s GDP, compared to just 10% in the U.S. The rising protectionism caused by the crisis is thus creating a massive disadvantage for export-oriented economies and economic areas.

Background to The Crisis: The Impending Erosion of Global Deficit Cycles

With the erosion of globalization, the long-term economic strategy of strict export orientation pursued since the introduction of the euro by Germany, whose economic “business model” is based on achieving the highest possible trade surpluses, is also failing. This so-called beggar-thy-neighbor policy[17] exports debt, deindustrialization and unemployment to the target countries of the export surpluses. Initiated by Agenda 2010 and the repressive Hartz IV labor laws,[18] which massively reduced labor costs in the FRG, Germany was able to achieve extreme trade surpluses[19] with the eurozone until the outbreak of the euro crisis,[20] which contributed significantly to the creation of deficits and the outbreak of this European debt crisis. After Berlin had ruined the European crisis states through draconian austerity policies,[21] this export strategy was directed towards non-European countries.[22]

As a result, after the euro crisis, the eurozone ran high surpluses with non-European countries similar to those Germany had previously run with the European currency area. This can be clearly seen in the trade balance between the U.S. and the EU, which was put on an austerity diet by Schäuble.[23] The U.S. trade deficit rose from about $58 billion in 2000 to just under $100 billion in 2011, and then rose again to $218 billion in 2021 (Germany accounted for around a third of the U.S. trade deficit in 2021[24] ). But in 2022, European surpluses fell to around $202 billion due to the rise of protectionist measures in the United States. The same Financial Times, which recently painted a picture of Europe’s economic decline, described this change in Washington’s economic policy strategy in mid-2023,[25] initiated by the Trump administration and pushed further by Biden. At its core, it is a protectionist rejection of globalization. By means of a “foreign policy for the middle class,” the White House wanted to counteract the “hollowing out of the industrial base,” the emergence of “geopolitical rivals” and the growing “inequality” that threatens democracy.

A visible expression of the full onset of deglobalization is so-called nearshoring, with which the U.S. is attempting to replace its economic dependence on the Chinese export industry by building up industrial capacities in Mexico.[26] However, Washington’s protectionism aimed at reindustrialization is not only directed against its “geopolitical rival” China, but also against “German” Europe – for example, in the form of the Buy America clauses in Washington’s economic stimulus packages[27] and the continuing threat of transatlantic trade wars. In mid-October, the EU and the U.S. failed to reach a compromise in trade talks that would prevent the reintroduction of punitive tariffs on steel and aluminum from Europe at the beginning of 2024.[28] In addition, German automotive suppliers are still threatened with exclusion from U.S. production chains due to provisions of the U.S. Inflation Reduction Act subsidy program. A substantial concession from Washington is also unlikely, as protectionism seems to be working. German companies are increasingly investing in the U.S. to take advantage of Washington’s subsidies.[29] Indeed, annual private investment in the United States has exploded: from around $75 billion at the end of 2020 to $204 billion by the third quarter of 2023.

Berlin spent the 21st century steering the Federal Republic[30] – and from 2010, in the wake of the euro crisis, the entire eurozone – towards an export-oriented economic model aimed at achieving trade surpluses in the globalized world economy of the neoliberal age. With deglobalization in full swing, the former export surplus world champion has found itself in an economic policy impasse, which in the medium term calls into question not only the economic stability of the Federal Republic of Germany, but also the political survival of the eurozone. The systemic background to the crisis in this new phase,[31] which is characterized by protectionism, is the increasing erosion of the global deficit cycles that characterized neoliberal globalization and its ever-growing mountains of debt.[32] The global increase in debt,[33] which has outpaced the growth of global economic output, has not been uniform, leading to imbalances in global trade. Export-oriented economies such as China and Germany ran large trade surpluses with the deficit countries, which had to borrow. And the U.S. has by far the largest trade deficit,[34] which climbed from about $328 billion at the end of the 20th century to $816 billion at the start of the housing crisis in 2008, and then to $1.17 trillion in 2022.

The United States thus resembles a black hole in a global economy choking on its own productivity where export-oriented industrialized countries can sell their surplus production.[35] This is why consumption plays such a central role in the U.S. economy. This is only possible because the dollar is the world’s reserve currency and the same countries that run trade surpluses with the U.S. also finance its deficits by buying U.S. bonds. China, which runs huge trade surpluses, remains one of Washington’s most important foreign creditors. This is precisely the core of the deficit cycles that have been established under neoliberalism and are an expression of the crisis-induced debt compulsion[36] of the world system: Hyper-productive capitalism runs on credit, with the U.S. in particular running ever larger trade deficits, while “exporting” “securities” in the opposite direction. In the U.S., the financial sector, which was constantly creating new speculative bubbles, gained a lot of weight. Many factors put an end to this absurd neoliberal protraction of crises: the growing number of financial crises – above all the real estate crisis in 2008 – the social consequences of deindustrialization including the formation of rust belts, the rise of right-wing populists like Trump, and finally the full-blown inflation that set in with the pandemic and the war in Ukraine,[37] which made a turnaround in interest rates indispensable.[38]

A Changing Battleground

As a result, Washington is no longer willing to accept the United States’ extreme trade deficits because the costs – political, social and economic – are too high. The Biden administration is effectively just continuing Trump’s protectionist policies. With this U.S.-initiated global turn to a new phase of crisis, the competition between states is also changing – the advantages that export-oriented locations like Germany had are turning into disadvantages in the dawning era of deglobalization and protectionism. The long slide of the euro,[39] which has lost about 50 percent of its value against the greenback since its all-time high in 2008, boosted German exports because of its structural undervaluation as long as trade routes remained open. But now that trade barriers are rising, a weak currency is simply importing inflation.

The U.S. seems to have all the advantages on its side to push the EU into a peripheral position economically and politically, as the European think tank European Council on Foreign Relations recently warned in stark terms.[40] Countries with trade deficits have a strategic advantage in serious trade wars, since their deficits tend to be reduced, while economic areas with export surpluses, such as Germany or the EU, can only lose in such disputes. In addition, deglobalization is characterized not only by a rapid increase in trade barriers (the FT counted 801 new protectionist measures worldwide in 2022, compared to only 210 in 2017),[41] but also by increasing bottlenecks and import barriers for key raw materials and resources that many new industries need. The U.S. has a crucial strategic advantage over the EU, namely its military machine, which it can use to intervene if necessary to secure the supply of necessary raw materials. This is an important factor for capital in deciding where to locate. Finally, it is the U.S. dollar that allows Washington to borrow in the world’s reserve currency.

At the same time, however, a new economic battleground is opening up that is closely intertwined with the protectionist efforts to reindustrialize the U.S.: the wonderful world of the bond markets.[42] Interest rates on U.S. bonds, known as Treasuries, have skyrocketed with the central banks’ turnaround on interest rates, meaning that the U.S. budget is likely to be burdened with exploding interest costs of $660 to $800 billion in 2023. At a time when Washington is forcing the re-industrialization of the U.S. through credit-financed economic stimulus programs, the cost of borrowing for the U.S. budget is rising.[43] The usual method of keeping interest rates low despite enormous government borrowing is currently unavailable: the Fed cannot buy up Treasuries as in previous years because this would undermine the fight against inflation – when central banks buy up government debt, they are effectively printing money. What’s more, central banks have trillions of dollars of Treasuries on their balance sheets, which were bought up with freshly printed money during the period of “quantitative easing.”[44] And next year, Washington will have to service some $7.6 trillion in debt, which will put even more pressure on the bond market (bond prices fall as interest rates rise).

The fall in U.S. bond prices as interest rates rise not only destabilizes the financial sector, as was recently the case during the banking crisis in the spring of 2023,[45] but also calls into question the strategic role of Treasuries in the global financial system, as the Financial Times (FT) noted in October 2023.[46] U.S. Treasuries are supposed to be the stable backbone of the global financial system, they are held by strategic investors (pension funds, insurance companies, etc.) who need to achieve a reliable, albeit low, return. The constant volatility on the bond market, the large fluctuations in the value of Treasuries, call into question this anchor function of U.S. bonds; they can hardly function as a “safe haven” in the financial sphere. The FT warned in November 2023 that the “supply” of Treasuries has long exceeded the market’s demand, as the central banks have had to stop their buying programs to fight inflation.[47] Analysts warned the business paper that Washington’s “fiscal framework” could not be maintained in this form.

The Fed has effectively had to play a central role as a bond buyer in recent years, as the most important foreign buyer of U.S. bonds in the 21st century, the People’s Republic of China, has been rapidly reducing its holdings of Treasuries. In 2013, China held about $1.5 trillion in U.S. bonds; by January 2023, that figure had fallen to just $859 billion.[48] China’s withdrawal from U.S. bonds could not be offset by other foreign buyers, such as the UK, especially as the debt mountain of the U.S. grows rapidly. In 2016, a year before Donald Trump took office, nearly 45 percent of all U.S. bonds were held by foreign investors. By the second quarter of 2023, however, that figure was less than 30 percent.[49] This withdrawal of foreign investors from the U.S. bond market, which really took off in the Trump era, is in fact a consequence of Washington’s protectionist reindustrialization efforts. This can only be understood in the context of the aforementioned deficit cycles. The implicit deal underlying the deficit cycles was that China’s export surpluses to the U.S., for example, would be financed by buying up U.S. debt. As soon as Washington unilaterally breaks this deal through protectionism, the tangible, material incentive for Beijing to continue investing the capital generated by export earnings in U.S. bonds also disappears.

Washington’s unilateral abandonment of the deficit cycle, which was intended to reindustrialize the country, is thus leading to the destabilization of the United States’ ever-growing mountain of debt. The economic advantage the U.S. has over the eurozone, which American business journals like to talk about so much, is thus accompanied by increasing financial risks, which German business journals in turn like to point out – with the spitefulness characteristic of bourgeois business journalism on both sides of the Atlantic.[50] For now, Washington can only hope that inflation in the U.S. will subside more quickly than in the eurozone, so that it can return to the Fed’s practice of “quantitative easing” (until it fuels inflation again). Otherwise, active economic policy would have to be stopped – which only points to the fragility of the economic recovery in the U.S.[51]

Ultimately, these economic policy disputes are merely executing the objective crisis dynamics in a late capitalist world system suffering from a structural overproduction crisis. The decades-long crisis process, which has been gradually eating its way from the periphery to the core since the 1980s, has now fully engulfed the latter. As a result, the transatlantic alliance is in a state of pure crisis competition: who will go down when the next crisis hits? The U.S., China or Europe? The trade and economic policy battles are thus acting as the executors of the crisis.

I finance my journalistic work mainly through donations. If you like my texts, you are welcome to contribute – either via Patreon, via Substack, or by direct bank transfer after consultation by e-mail:

[1] https://www.wsj.com/articles/europeans-poorer-inflation-economy-255eb629

[2] https://www.ft.com/content/e0177eb7-8d17-48aa-a6ad-fccd0655f557

[3] https://www.zeit.de/wirtschaft/2023-07/usa-europa-wirtschaftswachstum-wohlstand-lebensstandard-lebenserwartung

[4]h ttps://www.zeit.de/2015/29/europaeische-union-krise-veraenderung-bruessel

[5] https://www.konicz.info/2018/08/20/griechenland-zu-tode-gespart/

[6] https://unrast-verlag.de/produkt/aufstieg-und-zerfall-des-deutschen-europa/

[7] https://www.konicz.info/2016/10/25/der-paneuropaeische-haushaltsdiktator/

[8] https://www.nd-aktuell.de/artikel/976285.suedeuropa-wird-lateinamerikanisiert.html

[9] https://www.konicz.info/2007/03/05/vor-dem-tsunami/

[10] https://www.zeit.de/wirtschaft/2023-07/usa-europa-wirtschaftswachstum-wohlstand-lebensstandard-lebenserwartung/seite-2

[11] The collapse of Soviet-style state capitalism in the so-called “Eastern Bloc” was accompanied by a similar, sometimes more drastic collapse in average life expectancy.

[12] https://www.cnbc.com/2023/10/31/62percent-of-americans-still-live-paycheck-to-paycheck-amid-inflation.html

[13] https://www.nytimes.com/interactive/2023/09/25/climate/fracking-oil-gas-wells-water.html

[14] https://www.tagesschau.de/ausland/amerika/fracking-colorado-101.html

[15] https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/

[16] https://www.statista.com/statistics/265843/monthly-inflation-rate-in-the-euro-area/

[17] https://en.wikipedia.org/wiki/Beggar_thy_neighbour

[18] https://www.konicz.info/2013/03/15/happy-birthday-schweinesystem/

[19] https://www.konicz.info/2012/12/21/der-exportuberschussweltmeister/

[20] https://www.konicz.info/2010/05/04/krisenmythos-griechenland/

[21] https://www.konicz.info/2018/08/20/griechenland-zu-tode-gespart/

[22] https://www.konicz.info/2015/04/18/die-deutsche-exportdampfwalze/

[23] https://www.census.gov/foreign-trade/balance/c0003.html

[24] https://www.census.gov/foreign-trade/balance/c4280.html

[25] https://www.ft.com/content/77faa249-0f88-4700-95d2-ecd7e9e745f9

[26] https://www.konicz.info/2023/11/20/neue-kapitalistische-naehe-2-0/

[27] https://www.konicz.info/2023/08/26/bidens-improvisierter-masterplan/

[28] https://www.manager-magazin.de/politik/weltwirtschaft/eu-usa-gipfel-europaeische-wirtschaft-enttaeuscht-a-280ff7dc-d173-425a-a8c9-f6a204cacccb

[29] https://www.tagesschau.de/wirtschaft/weltwirtschaft/us-subventionen-deutsche-konzerne-investitionen-101.html

[30] https://www.konicz.info/2015/04/18/die-deutsche-exportdampfwalze/

[31] A brief outline of the capitalist crisis process can be found at: https://oxiblog.de/die-mythen-der-krise/ or https://www.konicz.info/2011/12/23/die-krise-kurz-erklart/ See also: Robert Kurz, Schwarzbuch Kapitalismus, available at: https://www.exit-online.org/pdf/schwarzbuch.pdf ; or: Tomasz Konicz, Kapitalkollaps. Die Krise als historischer Prozess (still available as an ebook).

[32] https://exitinenglish.com/2022/08/12/a-new-quality-of-crisis/

[33] https://www.imf.org/en/Blogs/Articles/2023/09/13/global-debt-is-returning-to-its-rising-trend

[34] https://www.census.gov/foreign-trade/balance/c0004.html

[35] https://www.telepolis.de/features/Die-Krise-kurz-erklaert-3392493.html?seite=all

[36] https://oxiblog.de/die-mythen-der-krise/

[37] https://www.konicz.info/2021/08/08/dreierlei-inflation/

[38] https://exitinenglish.com/2024/03/06/inflation-financial-crash-or-recession/

[39] https://www.tagesschau.de/wirtschaft/boersenkurse/eu0009652759-25108390/

[40] https://www.brusselstimes.com/622334/europe-is-becoming-a-us-vassal-leading-think-tank-warns

[41] https://www.ft.com/content/3bd28362-c006-44c3-9f7f-a89a78452600

[42] https://exitinenglish.com/2022/08/12/mountains-of-debt-on-the-move/

[43] https://www.konicz.info/2023/11/12/inflation-finanzkrach-oder-rezession/