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Innocent victims?

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Stephanie Flanders | 12:59 GMT, Friday, 13 February 2009

After today's appalling growth figures from the eurozone, I'm starting to think that the UK will lose the competition to be the worst hit by the credit crunch.

Earlier this week, I said that this recession wasn't going to be fair. Looking at their fourth-quarter GDP figures, the Germans would surely agree.

When drawing up a list of those unfairly penalised in this recession, it's tempting to add the world's exporters to the list.

BERLIN - DECEMBER 15 2008: A worker moves parts for high-voltage circuit breakers at a factory of German engineering company Siemens on December 15, 2008 in Berlin, Germany.  Sean Gallup/Getty ImagesAmong European economies, Germany stood out as one that had risen to the challenge posed by globalisation. It saved. It invested. Against the odds, through reunification, through the downs and ups of the euro, it had stayed at the top of the league of global exporters.

Now, like savers and exporters all over the world, it's being hammered. Output fell by 2.1% of GDP in the fourth quarter - the worst fall since reunification in 1990.

That's worse than the UK, and far worse than France. It's even worse than Italy, for goodness' sake.

Germany was the first major economy to officially go into recession last year. The forecasts are now for another decline in 2009, of around 2%.

Like Japan, Korea, and the rest, Germany is being punished for its heavy dependence on exports.

So, another list of innocent victims to add to the roll-call? Well, yes and no.

In the parable of domestic savers versus borrowers, it's easy to see who has prudence and justice on their side. But when you're talking about countries, things are less clear-cut.

It is true that these countries did what they were "supposed to do" - they saved and produced rather than borrowed and spent. But they did an awful lot of saving and producing. And not very much spending.

That meant they had a lot of extra savings and products they needed to offload on everyone else - also known as an enormous current account surplus. And as we all know, the flip side of their collective surplus was a big deficit in countries like the US and UK.

In an ideal world, those imbalances would have gone away over time, as the currencies of the exporting countries got more expensive, and currencies like the dollar went down. But, as we all also know, that didn't happen.

The big Asian exporters accumulated a mountain of spare cash instead, which they invested in dollars to keep their currencies low.

Germany didn't go in for all of that. But, as Martin Wolf points out in his excellent book, Fixing Global Finance, it has long been among the world's leading excess savers. We just haven't noticed quite so much, because its current account surpluses have been offset by deficits elsewhere in Europe.

In 2006, it had a surplus of savings over investment of 5% of GDP. Germany's current account surplus that year was around $150bn, the third largest in the world after China and Japan. The US deficit that year was over $850bn.

Sooner or later, those imbalances were going to have to be unwound. And the longer they lasted, the bigger the chance that the "great unwinding" would come with a giant thud.

I noticed in Davos that the (few) Americans there didn't like to think they were victims in all this - the poor innocents who kept an imbalanced world going by force of credit cards alone. They'd prefer to be cast as the global imbalances villain, if those are the alternatives on offer.

But, as Keynes said many years ago at Bretton Woods (and as Mervyn King reminded us in his press conference earlier this week), the responsibility should cut both ways.

Back then, Keynes said the world needed a system where surplus countries had an incentive to adjust - not just deficit ones. He didn't get one. And the world never has.

The result is a system much more prone to boom and bust cycles - which ultimately hurt the saver/exporters as much as the borrowers.

Germany, Japan, and others are now learning that lesson the hard way. There's plenty of blame to go around. But don't think they are immune.

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