"The road up and the road down is one and the same." Heraclitus 535 BC–475 BCNot all countries can run trade surpluses at the same time; someone's exports is someone else's imports.
"The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days". Wolfgang Schäuble
Wolf-pact version one - German Surpluses
"Take Germany. In the late 1990s it was the undisputed “sick man” of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline ...... A first wave of adjustment, starting in 2003, focused on strengthening employment incentives, streamlining the public sector, fixing social security and raising consumption taxes. Down to shop-floor level, companies and unions worked together to make labour more flexible........" Wolfgang Schäuble
Why? Here's a slightly classical (not Keynesian one to scare German readers away) account
When the sales value generated by the demand for a country's exports exceeds the sales value of its demand for imported goods, the excess value appears as surpluses in the country's trading account. The surplus is an excess demand (for exports relative to imports) and, as such, a pressure for prices of exports to rise relative to imports. There is no internal eurozone system of exchange rates to do this in one movement. Hence the argument for economic reforms to ensure perfectly working competitive markets. However, if the price mechanism works then this excess demand transmits a demand that leads to higher prices of resources producing German exports ie it ought to be signaling a rise in wages.
However, here lies Schäuble's "down to shop-floor level, companies and unions working together to make labor more flexible" - a strange meaning of flexibility that restricts German wages from being upward flexible.
When the price of labor is suppressed then the demand for other inputs (producing any given level of output) and other production mixes are suppressed, This undermines real investment, distorting the production mix to screw up the economy's 'production function". Keeping wages down below their "market values" damages the efficiency and growth potential of an advanced industrial economy.
Thus to persistently maintain trading account surpluses is to perpetuate a disequilibrium; one that screws up the price mechanism in a way that doesn't allow the excess demand for German exports to be translated as a demand for investments in technology factories, etc. To do it persistently, is to move the economy towards a cheap labor one and away from the traditional German capital intensive one.
And so trading imbalances create investment problems (for a different way of looking at this see a previous post National Output for Mummies 101) and this is what the statistics show - Germany has a huge private investment gap.
"The share of investment in gross domestic product is one of the lowest among industrialised countries. It has been declining rapidly, from an average of 23 per cent in the 1990s to less than 17 per cent today" Investment, not the surplus, is Germany’s big problem Fratzscher 18th Nov 2013
|via @LThomas12 CA Surplus and investment are highly negatively related.|
A second foolish idea, is the macho idea that surpluses reflect a superior method of production or product: the German brand. There are better cars in the world than Mercedes; but they don't dominant sales. There are worst cars in the world than Mercedes, but they can dominate. It all a question of price. And if Indian (Land Rovers) and China invest better than Germany, then even Mercedes won't be cheap enough.
German trade surpluses is also a German investment problem but, unfortunately, it is far more than this. An imbalance does not exist by itself. It breaks the European investment mechanism and, as a massive trading block, damages global investment markets. A system that leads to a gross mis-allocation of resources cannot be considered to be an efficient one. The levels of idle resources (unemployment and under-investment) scatter around the continent of Europe are a reflection of the trading imbalances and the foolish beliefs that are attached to them.
How did this work? By definition, Germany's trading account surplus means the country is a massive net lender to others. A surplus in one place implies a deficit in another place. Up to the Euro crisis, these capital outflows were based on financial returns and guarantees that did not reflect economy's actual economic returns, They were based on balance of payments funding needs. The surplus led to over-lending that fueled property and bond (trading deficits have to be financed) bubbles that burst as unsustainable debt crises in the periphery. When the bubble burst, the risks were were minimized by lenders exerting political control - by doing whatever it takes - to extract measures on the borrowers.
The dark side of the trading imbalance was that the resulting profits were private and the resulting risks and losses were public. The only argument circulated at the time of the Euro crisis was which 'public' (eg the German or Greek) should pay.
So one way to see German trading surplus is as losses to the very Germans that produced them. At one level it is the result of underpaid effort in producing excess output on the part of German workers who are also overpaying for the imports they consume. At another level, it is answered by asking what returns and benefits did such a sacrifice bring? Let me put it another way, where's the investment?
Trading surpluses exited the German economy, disappear and bubbled into the financial markets and very little , if any, of that has its way back into German workers' pocket. If the agreements made in the German labor market were supposedly for the public good, then the trading surpluses also represent funds and lost opportunities in social expenditures and public investments. Schäuble is very proud "in streamlining the public sector, fixing social security and raising consumption taxes".
Germany is becoming a cheap wage rather than an investment economy. Trade surpluses eventually manifest themselves as losses the German people. They are not good. They don't represent how well you are doing, but how well you could have been doing.
Wolf-pact version Two - from German to Euro-wide surpluses
"Everything flows and nothing stays." Heraclitus of EphesusWhen the Eurozone stopped working, austerity was applied on the periphery. The solution offered to deficits countries, was to do what Germany did ie repress wages and, thereby, destroy their own internal investment mechanisms.
"A second wave of expenditure restraint and reforms followed once the financial crisis was past its peak....Thanks in part to its education system, which is attuned to the needs of business, Germany has a youth unemployment rate below 8 per cent – the lowest in Europe" Wolfgang SchäubleHas there been a revolution in the German education system? Or is it really the case that talented, skilled labor resources are flowing in from the periphery economies where youth unemployment exceed 50%? What is happening to the education system in the countries they are coming from?
"The adjustment was ambitious and sometimes painful but its implementation was flexible and adaptive. The European safety nets have provided a well-calibrated mix of incentives and solidarity to cushion the pain." Wolfgang SchäubleThere is no European safety net or solidarity to cushion the pain. These have been systematically ripped out in the periphery. The "well-calibrated mix of incentives and solidarity to cushion the pain" refers to pain of credits rather than debtors.
"In just three years, public deficits in Europe have halved, unit labour costs and competitiveness are rapidly adjusting, bank balance sheets are on the mend and current account deficits are disappearing. In the second quarter the recession in the eurozone came to an end." Wolfgang SchäubleAgain this is the cheap wage model and its meaning of competitiveness. "Bank balance sheets are on the mend" as they are not lending and investing in businesses. "Current account deficits are disappearing" as this what would happen when consumers become too poor to buy imports. "The recession in the eurozone came to an end" or rather, lets redefine structural and natural unemployment rates in each eurozone country and not call it a depression.
There is no end to the recession in the periphery and there is no liquidity in the periphery
Imperfect monetary unions worked by population movements. Populations are being made to suffer or migrant. The periphery economies of the Euro are forced, unwillingly but bonded by debt. to apply internal devaluation. The only real intent (excluding the increasingly but interestingly contradictory IMF) is not a major internal political and market reform of oligarchical and cartel market structures, but wage suppression (unit wage costs).
The obsession to create surpluses emphasizes cheap wages rather than sound economic investment. As a result the core economies have a greater and greater appetite for labor resources. In paricular
"Germany is ageing and shrinking. France and Britain will overtake it soon, in terms of population. Too few women enter the workforce and they have too few children. Germany is over-reliant on industry and underperforms in services. Over half of every generation leaves school after 10 years, often with only a rudimentary knowledge of English and similar cultural skills. Immigrants are still not welcome. Most of these problems could be fixed with quotas for women in senior management and for immigrants in the civil service and the police; allowing dual citizenship; and encouraging kids to stay at school. But these reforms are unlikely to happen." Guardian: Why Germany's strength is an illusionThis shortage not cleared (by demand and supply) by wages increasing, but by draining and selectivity picking from a large pool of idle labor resources from an increasingly poor periphery.
Again it is not good for the German worker. It is keeps German wages low, but this time by labor resources (immigration) flooding in from the periphery to increase competition for jobs. Its a toxic mix that will increase nationalism and racial tensions.
Thus Europe moves, disastrously, en mass towards a cheap wage model economy. Even more disastrous, when one realize that the EU raises taxes from its working population to finance a system (Common Agricultural Policy CAP) that creates artificially high foods prices. A policy of lower wages with 38% of EU budget for the next five years going to CAP. Yet, only 5% of the EU population work on farms. Something has to give. Even without the political chaos and under investment, a cheap wage model of the economy is not sustainable when also coincides with a system that keeps food prices high.
Suppose somehow it does hold together, and labor flows back and forth between the core and the 'homelands' in the periphery in tune with the demands of core's economy. As cultural and national loyalties and prejudices increase, the pressure (governments are forced to balance their budgets) will increase on richer EU member to tighten up immigrant residency, voting and social benefits rights. It then not that great a step for the European labor market to fragment into a kind of apartheid system with different class of rights and conditions in each of the 'euro homelands'. Unless you are one of the fortunate few that will be reaping profits from such a system, it is good for no one....of any nationality.