12 February 2015

Germany is a very inefficient economy

The European Union not so long ago received a Nobel (inventor of dynamite) prize for remaining in one piece.  Before it blows up, let me take the opportunity to lob a stick of dynamic.

The Germany economy is really inefficient..... 

there... you may now click and leave

So let me begin by apologizing to German readers who are unwtting victims. It must be painful spinning around on Schäuble's treadmill. And, as the "BIld" will tell you, we having such a jolly crisis at your expense. But.... 
"The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days".  Wolfgang Schäuble 
So let me call it the Schäuble economy, as many Germans are being treated unfairly by it.  Here's his success story:  
"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 
You may well ask why Germany was the "sick man of Europe" in the late 1990s - but lets leave that other monetary union (the German Mark and German unificiation) aside for now. 

What is the primary goal of the Schäuble economy?  To chase down little pots of gold, found at the end of the rainbow, called trading surpluses.  

If it weren't for the euro or for agreements in the labour market that Schäuble mentions above, then this excess demand for "all things German" would have raised the price of German goods, increased the demand and the wages of the workers that produced these goods, and eliminated the trade surplus. 

Schäuble trade surplus means that wages are lower than what they would be (without the agreements). It also means the wages are also lower that what they would be relative to capital (so we use less machines, robots etc in the production mix). So more labour (which Schäuble economy sucks in from the periphery's pool of idle young) and less capital is being used than what would otherwise have occurred. In other words, there is less physical investment and this production mixed creates a lower or sluggish growth rate. This drags down the growth rate not only of the Schäuble economy, but the entire European continent with it.

In other words the German or the Schäuble economy is highly inefficent one in its misuse of resources and dooms the European economy, by getting investment wrong, to lag behind the rest of the world.  This inefficiency is paid by imposing austerity on taxpayers living in the periphery

So if surpluses are wasteful, Germany is Europe's most inefficient economy.

Here is the statistical data showing the current (trading) account surplus moving in the opposite direction to the levels of capital stock. 
via @LThomas12 CA Surplus and investment are highly negatively related.
"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%in the 1990s to less than 17 per cent today"  Fratzscher 18th Nov 2013

The 1990s was a story of the impact of German unification and the influx of cheap East German labour. The pursuit of trading surpluses within the Eurozone, by agreements to keep real wages down, re-writes the Schäuble's 1990's "Sick man of Europe" story into a massive expansion pack of 28 volumes. Everyone in the Eurozone, and beyond, becomes sick.

The frugal German's housewife's chase for surpluses may be a very cute story, but what is she going to do with those damned surpluses? 

Give them to the Greeks or hide them under her matress? They didn't go into real investment. 

This is unfair on the  taxpayers (and the frugal Athenian housewife who economises by scavenging bins) of other economies who pay for the obsession until they go broke. 

Usually one intervenes, when one's friends is caught up some habitual immoral behaviour. One is almost tempted to show solidarity and ask for the Troika to be sent in.


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    1. This post also appears at http://www.keeptalkinggreece.com/2015/02/13/guest-post-german-economy-inefficient-through-schaeubles-macho-economics-frenzy-trade-surpluses/

  2. Of course trade surpluses are not desirable but Germany had trade surpluses and the US had trade deficits for decades. So this has nothing to do with the Euro.

    Furthermore a trade surplus does not equal an efficiency or inefficiency of the economy.

    1. Thank you for your comment

      First a general point. If exchange rates are flexible then trading surpluses and deficits cannot exist. If they are fixed (or pegged) then a surplus means more resources are going out than coming in -- that is, there will be a greater demand for the domestic currency than the foreign currency to pay for imports. A surplus or deficit will therefore have monetary effects. The euro system is like a fixed or pegged exchange rate system. Thus it has every to do with the Euro and money will appear cheap or expensive (the interest rate) according to the country's trading balance, see later.

      Second: What is efficiency? Hint: why was the Soviet economy regarded as inefficient?

      1. Productive efficiency: Technical efficiency specifically refers to to the optimal combination of inputs, i.e. using minimum combination of labour and capital to produce a certain quantity of output. Include costs and we can say the least cost way of producing a particular output.

      2. Allocative efficiency: There is no point in being productively efficient if all resources are diverted to making something that is absolutely useless. There is a story of the Soviet Union that one factory made left hand boots that would pile up as nobody wanted them. The next day they were burn so that the factory could start working efficiently again.

      The accumulation of stocks or surpluses is inefficient as resources could have been better used elsewhere.


      Thirdly: what generates trade surpluses and deficits?
      Classical demand and supply:. If demand exceeds supply the price of the good ought to rise; conversely, if the demand low falls short of supply, the price would fall. In this Adam Smith 'invisible hand' world, excess demand or supply pressures the price to change.

      If the price is fixed, the market is in disequilibrium (possibly unstable) with either a shortage (corruption/rationing?) or a continuous build up of a surplus. People don't exist in only one market, so the inability to sell (or buy) will affect the ability to buy (or sell) in another. Effects of how excess stocks/storages can be complex, particularly in financial markets.

      Now lets take it up a level. The demand and supply for a country's output will depend its price relative to what other countries sell their output. International competitiveness is nothing more than the relative price of the country output expressed in terms of a common currency ("real exchange rate" or terms of trade).

      Now lets accept that exporters and importers compare the prices of goods at home and aboard. The relative price of foreign to domestically produced goods is:

      (exchange rate)x(foreign prices) / (domestic prices).

      Trading surplus is an excess demand for domestic output; whereas trading deficit is lack of demand for domestic output. If there is excess demand or supply for these goods (that is trade surplus or deficit) then the relative price will change to restore competitiveness.


      However, for Euro members there are no internal exchange rates to adjust competitiveness. But ,if domestic product prices falls then demand for these products and competitiveness improves. The so-called internal devaluation. Unfortunately, unlike exchange rates which can adjust almost instantaneously, internal devaluation (or revaluation) is sluggish, uneven and messy and create surpluses and deficits. Trading surpluses can be re-cycled to finance deficits, but if you only reduce one side (the surplus or the deficit) "bubble" / collapse l follows: like the Gold standard of the 1920s and 1930's global depression.