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Wednesday, February 1, 2017

A Debate About Germany's "Exorbitant Privilege"

Exactly one month ago, I published the article "Will Donald Trump brand Germany as a currency manipulator?" As we know since yesterday - the answer is a resounding YES!

It was not (yet) the President himself who did it. Instead, his new head of the National Trade Council, Peter Navarro, launched the missile which will severely impact European economies in an interview with the FT. The Guardian and The Telegraph also reported on the issue.

Navarro's argument is as simple as it is correct: Germany enjoys and 'exorbitant privilege' as a member of the Eurozone: (a) thanks to the weak countries, the EUR is much cheaper for Germany than a separate DM would be, thus making German exports easier; (b) thanks to the weak countries, the EUR, which is too cheap for Germany by virtue of its structure, has devalued 30-40% in recent years against the USD, making the benefit for Germany even greater; and (c) thanks to the weak countries, capital has flowed into Germany like a tsunami, allowing the German state to save billions in interest expense every year.

Where Navarro is wrong is when he blames Germany for manipulating all of this. In actual fact, Germany's 'exorbitant privilege' derives from the structure of the Eurozone and not really from actions or decisions on the part of the German government. Thus, it would be unfair to blame Germany for it. What Germany can indeed be criticized for is that it doesn't give the Eurozone much in exchange for enjoying that 'exorbitant privilege'.

It also needs to be pointed out that Germany is not the only beneficiary of the structure of the Eurozone. One could probably generalize and say that the Euro is too cheap for all of Northern Europe and too expensive for all of Southern Europe.

Responses from the European side to Navarro's statements have been rather weak so far. Chancellor Merkel issued some commonplaces about the ECB's acting independently. Other German commentators are bluntly saying that if only all the other countries had behaved like Germany, ALL countries would share the same 'exorbitant privilege' (which is equivalent to adding arrogance to ignorance). There have also been musings out of Brussels that Navarro does not understand the Euro. When this turns into real negotiations, the European side will have to be much better equipped with arguments than thay are now.

Progressive European economists and commentators (from Yanis Varoufakis on down) have made Navarro's point for years now. It will be very interesting to observe whether they hold on to their views now that the Trump administration is also making their point.

16 comments:

  1. You are twisting facts to come to self-serving conclusions.

    The so called "weak countries" in the eurozone are precisely weak due to the beggar thy neighbor policies of Germany. Germany is not only inflicting considerable damage to the south of Europe (including France) but also to its own citizens and its own democracy (actually the term german democracy is a laughable term).

    However, now in front of us we have a German Problem question in Europe which this time we must deal with without mercy. The only solution is that Germany need to brought to its knees and so it will.

    As far as Greece is concerned (so that we don't stray away from our topic), Greece must realize that it has an obligation to oppose and frustrate Germany at every possible turn. Germany and its supply chain countries are the stated enemy of Greece and should be eliminated once and for all (via war if necessary). The stakes are that high. Germany's death equals Greece's Life.

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    1. you're sounding rather ridiculous. Germany and Greece are Nato allies, as well as members of the EU. War between them is quite unthinkable. Were Greece to be attacked (yep, even by Turkey, another Nato member) Germany would have no choice but to come in on the Greek side.

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  2. Agree with the article. Prior to the crisis, capital flows from the North to the South would ameliorate the problematic structure of the euro. It's not a coincidence that the exchange-rate of the euro would reach it's peak during that period. After the crisis, the North chose to not restart or replace these capital flows, thus the problem became obvious. The question is, for how long shall the current situation persist? Hopefully, the new US administration will pursue their stated goal of reducing their trade deficits. This paradigm shift will hopefully make it obvious to the whole growth that growth needs to be symmetric (i.e. not based on persistent trade imbalances).

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    1. By all rational standards, Europe's progressives should start demonstrations in favor of President Trump. After all, he is saying what Varoufakis & Co. have been saying for years: that the EU serves for Germany's benefits and that the Euro is rigged in favor of Germany. Not too long ago, Alexis Tsipras would have managed to bring hundreds of thousands to Syntagma to protest against Germany.

      Where are all these people now?

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    2. Totally agree. In a worrying display of double-standards, a lot of these "liberal" commentators (Krugman, Coppola etc) have changed their tune after Trump's election.

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    3. My biggest concern, after trump and what is to come, as the "buffalo tussle around, is what will happen to the flies?"

      I do not believe the "death of Germany is the Life of Greece." I also do not believe in war. If the future of the Eurozone is really at its end, Germany and other northern strong nations will fire safe their economies at the best that they can. What will Greece do?

      I am certainly against this long stand of austerity in Greece, but the solution to our problem is not the demise of German or the euro groups etc. The solution to our problem is the necessary restructurings the programs have been stating. If we do not make the necessary changes while the buffalos tussle, in the after math, we as flies will not have wings to fly around.

      Maybe Tsipras is waiting for this unraveling of the Eurozone. He is fooled though that after the unraveling, Greece will be better off.

      What Greece should do, is fire safe itself by finishing off any necessary Key measures to make the Greek economy, more attractive after the dust settles in a fallen Eurozone/euro. This will give us a slight chance of survival in the aftermath.

      Sincerely,
      V

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  3. V:

    There are no such things as "Key measures" that need to be implemented. This is a euphemism for EU idiocy and fabricated nonsense by unlected bureaucrats in Brussels who have no clue what they are doing. They are only buying time at the expense of Greece.

    Greece needs to do precisely the opposite of what you are suggesting because adherence to idiocy never has solved any problem throughout human history.

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    1. Wait,

      You mean everything in Greece is working well? Do you even live in Greece? Or are you so blinded by your hypocrisy and hatred of foreigners that you do not even see what is wrong in your own country? Pop your bubble.

      Separate what is right from wrong on what needs to be done in Greece and then you will see that our advisors are seeing things exactly as we should be seeing them. Just because they have put us through hell and we have made some horrific decisions does not put all the blame on them.

      I can write a list of how many things are wrong in our country and you will agree. The majority of that list is on their list too.

      Sincerely,
      V

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  4. At the differences between northern and southern Europe, or if you wish Germany and Greece.
    That there was an imbalance was known from the beginning, that is what the 5 structural and investment funds were supposed to change. The funds were supposed to be invested in such a way that they would improve the economy in a SUSTAINABLE way, that did not happen in Greece.
    In todays climate of denying that "one size fits all", it is often forgotten that it was the original intention, the countries should converge toward each other. In a globalized economy the point to converge toward could only be a point that was globally competitive, a moving target. The only thing Greece converged toward was German living standards.
    PS. That the parties will part is inevitable, the strong economies, with the weak EURO, become complacent and do not develop as fast as they would, could and should do.
    Lennard

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    1. All eurozone countries converged in their unwritten obligation to buy german products; this is why we are in the mess we are in today.

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  5. Klaus:

    Could you please explain to us how come a washed up Austrian Blacknigger wants to be the President of the United States? Is this some form of seniors desease for other Austrians as well?

    https://www.youtube.com/watch?v=4y-X27wJFm4

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    1. Never underestimate those Austrians...

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  6. V
    I have come to the conclusion that you are capable of clear thinking.

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  7. It seems like everybody has forgotten that Germany was dead against the ECB's easy money policy, driving a lot of the EURO's devaluation at a time when USA were raising interests. In a recent interview Schauble even stated that he warned Draghi of the implications it would have for German exports. The naive suggestion that "Germany should import more" is not a solution, and certainly not for Greece. Countries don't import, people do, if they get better value for money.

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  8. The US GDP is currently around 18 trillion USD. 1% thereof would be 180 BUSD. The US current account deficit is currently around 3% of GDP. That would translate into about 540 BUSD. It has been over 6% only a few years ago, i. e. over 1 trillion USD.

    Let’s all remember Keynes now: when one party spends, another party earns. When the state spends, it stimulates the economy.

    Put this on to the global level: when one country spends, the rest of the world earns. The spending country provides stimulus to the rest of the world. For decades now, the US has provided phenomenal stimulus to the rest of the world (to the tune of 500 - 1.000 BUSD annually in recent years!).

    Conclusion from Economics 101: growth and prosperity in the rest of the world would have been significantly lower had it now been for the US current account deficits. Did anyone ever hear someone say „Thank-you, America!“? I haven’t. Instead, I have witnessed endless anti-Americanism in Europe.

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  9. >Kleingut ,
    Navro in the USA , observse German exports benefit from a weak Euro due to economically weaker euro states, But maybe that process also operates in America, American exports and American exporting states, benefit from a weak Dollar due to economically weaker American States.

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