Friday, November 1, 2013

Blasting & Rebuffing - The Battle of Current Accounts

At long last, the battle of current accounts seems to be on. It started with a blast ( (US blasts Germany's economic policies) and it was followed-up by a rebuff (Germany rebuffs US Treasury criticism).

It certainly is the right battle. The million-dollar-questions relate to the right solutions.

Before the Eurozone crisis began, my pet issue had been the current account deficit of the US. I had started my banking career in the early 1970s with an American bank. Somewhere at the beginning, I had to prepare a report on the US Interest Equalization Tax. That was a domestic tax measure implemented by President Kennedy in 1963 and it lasted until 1974. The design of the tax was to reduce the US Balance of Payments deficit (in short: some kind of 'infant industry protection' for the US economy).

Around the same time, I was observing how Americans started to import more and more from Asia, offset by less and less domestic production. I mentioned this in a discussion we had on the subject with colleagues at the bank. One of my American colleagues was totally unconcerned. He said "If the Japanese want to work 18 hours a day in exchange for us signing promissory notes, that's fine with me!"

The US has been doing a lot of signing of promissory notes since then. Easy for them to do because they can print the money when the notes fall due. Two things seems certain, though. First, had the US not run those enormous current account deficits, the rest of the world, in sum, could not have run enormous current account surpluses during this time. Secondly, US consumers might have consumed less and/or paid higher prices for their consumption products but certainly the rest of the world would have grown more slowly and with lower living standards.

Thus, the rest of the world actually ought to construct a monument in thanks to the consumption-addicted, no-fear-of-debt-having American consumer. At the same time, the rest of the world should look after the health of American consumers so that they can pay back their debt.

Fast-forward to the Eurozone and, specifically, to Greece. Clearly, Germany's current account surplus causes problems within the Eurozone. It would appear to be something which definitely cannot go on forever. Either Germany changes it or others will do it for it.

But what are sensible solutions?

The automatic reflex seems to be that Germany should increase domestic demand; i. e. run deficits so that imports from the South increase. Well, certainly with regard to Greece, I am not sure that this would change very much. Aggregate demand certainly stimulates aggregate supply but how does one make sure that Greece's supply is stimulated and not that of Asian countries? If Greece is to benefit from an increase in German aggregate demand, Greece has got to get its act as a supplier in shape!

My small home country of Austria has over 110 commercial delegation offices throughout the world; essentially, those are 'sales offices of the Austrian economy'. Also, Austria has an extremely active Business Location Marketing aiming at new foreign investments (so active, indeed, that Germany, Austria's major neighbor, has frequently complained about unfair competitive practices...).

A private Greek export consultant once explained to me that the Greek public export promotion agency is a huge apparatus but it is primarily interested in itself; in its political influence and in its relations with the public sector. Whether or not Greek exports are increased as a result of their activities is of secondary importance to them.

The Greek business location marketing unit (Invest in Greece) has a beautiful website and publishes wonderful prose. I have not heard of any major successes, though, and I am not aware that they are doing much by way of marketing Greek business locations abroad.

Well, these would appear to be two areas where some tough, neoliberal, efficiency-optimizing action should be helpful: install aggressive marketing people; streamline the organzation and get rid of everyone who stands in the way. Should that be 'commanded' by the Troika? Heck, no! It should be 'commanded' by Greek leadership and by everyone else in Greece who has an interest in getting the country's economy going again.

At the EU level, laws like the then US Interest Equalization Tax are unlikely to yield positive results. Wherever there is a new law/regulation, ways will be discovered to circumvent it. I am a firm believer in incentives because I believe that, essentially, economic behavior is driven by incentives. If Greece makes major efforts to export more and to attract more foreign investment (as described above), then the EU should set incentives so that Northern countries import more from Greece and invest more in Greece.

Barring gradual steps in the direction of balancing world-wide current accounts, I see a great likelihood that we may be moving into the direction of more controlled trade and capital flows.


  1. >"the rest of the world should look after the health of American consumers so that they can pay back their debt."

    Are you kidding? They will never be in a position to pay it back.

    H. Trickler

    1. I don't agree. The American economy is so huge and so flexible that many things can happen in a reasonably short time, positive as well as negative.

      Recall the last couple of years of the Clinton administration. Budget surpluses were running close to 500 BUSD annually. The big debate was what to do with them, give them back to tax payers of pay off the debt. Projections were that the US would be debt-free by 2010. The rest of the world was scared because they didn't know what would happen if there were no longer the safe haven of US treasuries.

      Well George W. Bush solved that problem in a hurry! A couple of giant tax cuts, Katrina, a couple of wars, etc. etc and, by golly, the US was not debt-free by 2010...

      I am not at all worried about the US even though their numbers are quite terrible. Always remember: the US can print the currency in which it has its foreign debt!!!

    2. Herr Kleingut,

      the American economy IS huge, and extremely flexible; however their politicians are not.

      The problems with the deficit, which are a minor problem (something in the region of 4%) have been magnified beyond the ordinary by people who will not deal with practicalities.

      Unlike you, I am extremely worried by the US administration. With the debts they've racked up, their defaulting could cause a major upset. This will not be the politicians or administration deciding anything; they have demonstrated their ability to avoid taking decisions. That is to say, they print money rather than tackle thorny questions.

      My point is that with the situation becoming more unstable by the day, it will but take a small incident to push it over the line. That, sir, is a very real danger - and the more dangerous because you cannot prepare for such happenings save by ensuring that your own house is in order first.

  2. Will be linking this to a related discussion on You have stated the problem very clearly, but the political reality is that Germany is less and less dependent on peripheral EU for its market and is still growing. There is little incentive for any form of redistribution, no matter how wise it might appear. The imbalances in the Eurozone are likely to increase, not diminish. The US ultimately relies on its military dominance not to have to pay back its borrowings.

    1. There is a price to pay for sustained current account imbalances, be they positive or negative. Greece is now paying the price for having had enormous deficits for too long.

      I think one of the major reasons why the 'price' of surpluses has not yet reached the awareness of German tax payers, voters and citizens is that they have not yet seen that a price is entailed with them. So far, they have - for the most part - only seen the positive sides. One 'other side' of those German surpluses so far has been that German banks, as exporters of capital, were involved in just about every foreign bubbly of late but the reason for that wasn't really understood by the everyday German.

      The real price will became apparent to everyday Germans if and when the German budget goes into the red (and when some austerity becomes necessary...) because Germany has had to recognize losses on rescue loans. Then they will ask "Why did we have to make those loans?" And they will have to be given the answer that "Those loans were, in fact, the consequence of having run such high current account surpluses". And then the everyday German may start to think. Perhaps.

    2. Let us put this the other way around: the US economy has been propped up by money printing. Whilst it continues, people will continue to buy things - from China and elsewhere. Are you then to tell small businesses not to export??? Because this is what your suggestion boils down to.

      In this case the macro economic side of things can only be dealt with by the US government.

      I agree that Germany's banks have been playing dumb and fuelling bubbles. But how else do you make a profit when competing with banks that are propped up by money-printing - the effect of which is to create yet more bubbles.

      Perhaps it's time for UK and US citizens to start thinking too?

    3. I suppose some could argue the Troika bail outs of the Greek government has been the surplus recycling mechanism in action. The surplus recycling mechanism that Varoufakis wants.


    4. limit_less
      Yes, the rescue loans have been a large part of the 'involuntary' recycling mechanism after the voluntary one had come to a halt. I would argue, though, that target2 has been the classic recycling mechanism.

      Before the crisis, private banks did the recycling by making loans to Greek banks to fund the current account deficit. When they stopped making loans, the current account deficit didn't really decline much for quite some time. Who financed it from then on? Correct --- target2! Not to mention the fact that target2 also allowed the recycling of huge amounts of Greek bank deposits which went offshore after the crisis.

    5. Gemma
      I am not telling anyone not to export. On the contrary, everybody should export as much as they can.

      I am, however, suggesting that a country should not, definitely not on a sustained basis, import hugely more than it can afford. The US has not been able to afford all the imports which they have bought. They got away with it (and will get away with it for a long time to come) because they have the printing press for the currency in which they have to pay for the imports.

      Of course, when one country imports less, the rest of the world will export less to them. But is that 'exporting less' or is it 'not exporting unjustifiable amounts'?

      This whole situation may change reasonably soon because I understand that the US, thanks to new oil production, is heading for a current account surplus in a few years. Then things will really get interesting because then the rest of the world will see their surpluses go down...

    6. Thankyou for your response, it is appreciated.

      Whilst the US has not been able to afford its current imports, the amount is surprisingly small. However, staunching the inflow of imports is a tricky business! Governments do not always tackle this with sensible measures, and is often seen as meddling. Or worse, trade barriers.

      Personally, I would weep no tears were trade surplusses to be diminished; to see trade deficits lessen - or be erased altogether - is truly something to pop corks for!

      On a more sombre note, this from Eamonn Fingleton in Tokyo:

    7. Gemma- " the amount is surprisingly small." I beg to differ.

      The trade deficit is 38 billions Euros a month. Greece is around 1 billion a month. The US has around 40 times the population of Greece. On a per person basis the trade deficit problem in Greece is the same as the USA.


    8. As far as I understand the situation, the deficit in the US is around 4% - and whilst on a par with Greece, when deficits are around 4% they can be dealt with.

      The Americans, like the Greeks - or at least those in charge - have not dealt with these problems. On the one hand by printing money and the other by allowing Germany to usurp the Euro.