Friday, November 29, 2013

The Most Effective Argument against Germany's Surpluses

At long last, I have seen an article which outlines the best arguments why it is in the interest of the Germans themselves to reduce their current account surpluses. I will start off by mentioning, once again, the key formulas which I have mentioned on several previous occasions:

Current account surplus = net exports of capital
Current account deficit = net imports of capital

Germany's current account surplus is not generated by the German state. Instead, it is generated by all of the economic agents residing within German borders (mostly the exporting businesses). The resulting capital exports are not made by the German state. Instead, they are made all by of the economic agents residing within German borders (to a large degree: banks, insurance companies, etc.).

As a mathematical (and not economic) consequence of the above: excessively high German current account surpluses MUST lead to excessively high German net capital exports. Germany, allegedly, is now the highest current account surpluser in the world. As a consequence, Germany is now the largest net capital exporter in the world. The world's largest lender. Gross foreign assets of the German economy already exceed 7.000 BEUR (!), more than twice one year's GDP.

The above has recently begun to develop into something which I have referred to as 'the battle of current accounts'. Clearly, looking at this situation from the rest of the Eurozone, Germany is perceived as a threat to balanced economic growth. Even the US has now joined the line of those who claim that Germany, out of its responsibility as one of the largest economies in the world, must do something to correct those imbalances.

'Germany must reign in its exports!' has become one of the popular slogans whose popularity is exceeded only by its silliness. 'Germany must increase its imports' is an intelligent slogan but it won't carry the day in Germany. 'Why should we if we don't need them?' the Germans might ask.

If one wants to get the attention of Germans, one has to warn them that 'their pensions might be at stake!' That will get their attention immediately. And, as the article so convincingly shows, that argument is absolutely correct! Thus, it is in the utmost interest of the Germans themselves to reign in their current account surpluses so that their net capital exports are reigned in so that the foreign assets of their economy are kept at a reasonable level.

Rough estimates are that the various bubbles since 2007 have already cost the German economy a 3-digit BEUR figure of its foreign assets (sub-prime, Lehman, Iceland, Ireland, Greece, etc.). Why have the Germans not been shocked by that? Because, so far, the bulk of these losses has been recorded at layers above the tax payers (banks, insurance companies, etc.). But the fact of the matter remains: if losses hit the foreign assets of an economy, that economy has lost assets; that economy has become poorer.

So what would be the most effective way to convince Germans that they should reign in their current account surpluses? Let me phase it casually: just scare the living daylights out of Germans that their pensions are at stake; that their sustained living standard is at stake for the simple reason that they export so much capital which is the consequence of the much praised virtue of being world champion with current account surpluses.

Would that be a lie? On the contrary, it would be the absolute truth! Money flows, directly or indirectly, from those who have it (surplusers) to those who need it (deficiters). The Germans may think that their foreign assets are all invested wisely and safely (if they haven't read the papers in the last 5 years). What Germans have to wake up to is the fact that their savings are, in the final analysis, in all those deficit countries whose risk they fear so much.

In a couple of months we will see German newspaper headlines exclaiming 'Record Current Account Surplus for 2013!' I wonder if a German publisher will have the nerve to publish the following headline instead: 'Shocking News! German Savings Put At Risk Abroad Reached Record Levels!'

It's the current account, stupid!

Given that Germany will have a current account surplus for quite some time, my advice would be that Germany export its capital more via investment than loans. Particularly investments in the South so that a country like Greece can build up productive capacities to make some of the products which Germans would buy. As of today, regardless of how much Germany would stimulate domestic demand, it would help Greece very little because Greece has only very little supplies to deliver.


  1. The first alarm will ring soon enough. Just wait until in the elections for euro-parliament, you will see more euro-scepticist MPs (an euphemism for "anti-EU parties") and less interest to go to vote than ever before.

    Contrary to german belief, there are other nations too that start asking themselves "wait a minute, what's in for me in this union?"

    If the alarm will not be heard, then there has been a prediction:

    Some people say you have to anchor Germany to Europe to stop these features from coming out again. Well, you have not anchored Germany to Europe, but Europe to a newly dominant Germany. That is why I call it a German Europe.”

    “Mitterrand and I know. We have sat there at the table [with Germany] very often indeed. Germany will use her power. She will use the fact that she is the largest contributor to Europe to say, ‘Look, I put more money in than anyone else, and I must have my way on things which I want.’”

    1. I think anyone who wanted to hear it would have heard loud and clear that the Germans agreed to join the Eurozone only after having made all sorts of clauses which would assure them that the Eurozone would be something like 'made in Germany'. In fact, in order to calm domestic objections, German politicians broadcast non-stop that the ECB would be run exactly like the Bundesbank; that the Euro would be as hard a currency as the DM; that no country would ever bail-out another country; etc. etc. In short, that the rest of the Eurozone would have to adapt to German behavior, or else...

      It seems that there were a lot of people who could have heard that but didn't want to hear it. I would guess their gamble was that, in the final analysis, Germany would not be able to pull it through. That, in the end, Germany would have no choice but to back up the Eurozone.

      The jury is still out whether that gamble was a good one or not. If I had to place a bet, I would bet that it was a good one because I believe that the pressure which will come upon Germany is likely to become unbearable for Germany. Not tomorrow; not next month; but at some time in the future (before the Eurozone blows apart uncontrollably).

      To me, Germany is in a no-win situation. Not tomorrow; not next month; but at some time in the future.

  2. if you were explaing it to someone who was new to the subject I think you would have to explain how the following statements are true

    Net current account surplus = net capital exporter
    current account surplus is created by exports.

    on the face of it, the opposite is true, as goods are exchanged for money.
    so that is goods exported and money imported but you are saying goods and money exported.

    so what are the actual processes that take place to result in a net exporter of goods being a net exporter of capital when trading withing the euro zone and also when trading in international trade across currencies. German companies are paid in euros and euros stay in the eurozone don't they, they are not exported.

    On a fundamental level in a two person economy one person exchanges goods for an IOU and is left with an IOU for to be exchanged for goods. But what is the actual trading process that leaves Germany with a lot of IOUs or exporting capital

    1. Think of, say, Germany during DM-times (or any other country). There was a local currency and there were foreign currencies. By definition, all cross-border transactions had to be in foreign currency because the DM was not an official means of payment in any other country.

      A foreign currency is no official means of payment in a country. Thus, every foreign currency which enters has to simultaneously be transferred back abroad. You may disagree and say what if BMW sells to Siemens and asks for payment in USD? Yes, Siemens will pay in USD but those USD will, in the final analysis, be outside of Germany. In the final analysis, there is only one place for USD and that is an account with a bank in the US. My USD maybe with a bank in Austria and that bank may have them in a USD account with, say, Deutsche, etc. But in the final analysis, the USD are in the US.

      The current account measures the economy’s operating revenues from outside one’s borders and the expenses outside one’s borders. By definition, those have to be foreign currency transactions because they are cross-border. If Germany has a current account surplus of 1.000 USD, the German banking system receives 1.000 USD more than it has to pay outside the country. As I explained above, that 1.000 USD excess needs to be transferred abroad because that is the only place where the funds can be put to work and earn interest. Thus, current account surplus = net capital export.

      This is a bit different in a currency union but the general concept is the same. The Greek economy is (still) spending more abroad than it earns abroad. Thus, it needs to import financing to cover the difference. The only differency is that the Euro is not only the foreign currency but also the official means of payment in Greece. Thus, the domestic money supply is affected by current account surpluses and deficits.