Germany may be the biggest loser if it doesn’t start spending 21 October 2014 Link
There’s growing pressure on Germany to spend more to support Europe – and for good reason. But it’s proving to be a hard sell to the country’s leaders.
Germany’s budget is balanced and the government insists that its current policy stance is the best it can do – for itself, the eurozone and the world at large. The government’s mantra is that a balanced budget inspires confidence, which in turn propels growth. That’s not actually happening of course, as is plainly visible for anyone to see, yet the ongoing stagnation and sense of crisis felt across the eurozone have only encouraged the German government to repeat its flawed logic.
The rest of the world is not amused, especially eurozone members that have been at the receiving end of Germany’s economic policy wisdom and have been more actively pushing against its gospel of austerity of late.
For much of the time since the euro was launched in 1999, Germany has depended on foreign purchases of its exports for its own meager growth, particularly when domestic demand stagnated for much of the 2000s, just as it does today. But Europe’s biggest country has not been willing to return the favor, as public and private investment remain severely depressed. Even as the government has just cut its own growth forecast for this year and next, it also signaled its continued stubborn refusal to change course.
A nation of surpluses
That protracted stagnation in domestic demand helped cause Germany to run up huge and persistent current account surpluses, averaging about 7% of GDP since 2006. Germany’s current account surplus, on pace to be the world’s largest for a second year in a row, is significantly bigger than China’s, which has declined sharply as a share of GDP from 10% to 2% since the financial crisis.
Meanwhile Germany’s has gone the other way, and its leaders do not see anything wrong with that. Rather, the government views it as evidence of the country’s sound policies and restored competitiveness. Eurozone partners are invited to follow the German lead. They are told to balance their budget, liberalize their labor markets and improve their own competitiveness.
There is something fundamentally wrong about this prescription. It is actually no surprise that the eurozone remains stuck in crisis today, a crisis that is in some respects worse than the experience of the Great Depression of the 1930s. Unless the rest of the world starts booming soon – and there’s no sign that it will – the situation in the eurozone is more likely to deteriorate further than improve on its own. Germany would do itself a big favor by finally acknowledging that its own model is not working for the eurozone and change track.
‘Sick man of the euro’
It may be a good starting point to highlight that Germany’s current account surplus was a key factor in bringing about the euro crisis in the first place.
Basically, a country that runs a current account surplus earns more than it spends and acquires net claims against the rest of the world. A country that runs a current account deficit spends more than it earns and accumulates net debts against the rest of the world. Prior to the crisis the eurozone as a whole had a nearly balanced external position. But internally the eurozone became severely unbalanced as more than two thirds of Germany’s external surplus was balanced by its own eurozone partners. When Germany followed the very same policies it now prescribes to its euro partners, the predictable consequences were just as those witnessed elsewhere today: at the time, Germany was known as the “sick man of the euro”.
But Germany got lucky. As interest rates fell across the eurozone, credit and spending booms were ignited in today’s crisis countries. Their spending fired the German export engine, while German banks were all too happy to refinance loans in Spain and elsewhere. So Spain and the other crisis countries ran up net external debts that reached about 100% of GDP. When crisis struck, private lending froze, leaving the currency union divided into debtors and creditors (mainly Germany), and separated by a severe competitiveness imbalance.
Germany’s painful prescription
This is where Germany’s austerity prescriptions for crisis countries come into play. These countries are lacking the external lifeline – booming exports – that rescued Germany a decade ago. Instead, they are sinking ever deeper into what is known as debt deflation, when their attempts to reduce indebtedness actually raises the real burden of the debt. To restore their competitiveness, they have to engineer a lower rate of inflation than Germany’s, so that their goods are cheaper. That’s tough given German inflation is only 0.8%.
And restoring competitiveness by deflation is especially painful. To actually reduce their indebtedness, the countries need to run current account surpluses and grow their GDP. That requires trade partners who are willing to spend – something that is hard to come by these days.
Certainly Germany is not returning the favor of increased spending that it received during the last decade. Indeed, the German government is adamant about not spending more. The euro crisis has proved too convenient for Germany, providing super-low interest rates and a euro exchange rate that has allowed the country to shift its notorious surpluses elsewhere. But Germany will be the biggest loser if the euro comes apart. Hopefully its leaders will wake up from their austerity-propels-growth dreams before it is too late.
Any expressed market opinion is my own and is not to be taken as financial advice
The arrogance of the Germans is always their undoing.
It took threatened class action by a law firm before VW took any action over their crappy cars just stopping cold on a road for no reason (DSG gearbox malfunctioning they said was not possible).
They refused to acknowledge this for years and it was killing people !
In the euro area, there had been little change in output in recent months and inflation remained well below the target of the European Central Bank (ECB). In response, the ECB announced further stimulatory measures at its September meeting. The ECB had unexpectedly reduced by a further 10 basis points both its policy rate, to 5 basis points, and its deposit rate, to -20 basis points, in September. The ECB had also announced that from October it would purchase ‘simple and transparent’ euro area asset-backed securities, including residential mortgage-backed securities, and covered bonds. While no explicit target was set, the ECB's intention appears to be to expand its balance sheet back to its crisis peak, which would be around 1 trillion euros larger than at present, through a combination of targeted long-term refinancing operations (TLTROs) and asset purchases. The ECB conducted the first of the TLTROs during September, with the take-up being lower than expected. Despite the deployment of considerable amounts of policy stimulus from the ECB, there isn't much light on the horizon, it has to be said.
In the euro area, there had been little change in output in recent months and inflation remained well below the target of the European Central Bank (ECB). In response, the ECB announced further stimulatory measures at its September meeting. The ECB had unexpectedly reduced by a further 10 basis points both its policy rate, to 5 basis points, and its deposit rate, to -20 basis points, in September. The ECB had also announced that from October it would purchase ‘simple and transparent’ euro area asset-backed securities, including residential mortgage-backed securities, and covered bonds. While no explicit target was set, the ECB's intention appears to be to expand its balance sheet back to its crisis peak, which would be around 1 trillion euros larger than at present, through a combination of targeted long-term refinancing operations (TLTROs) and asset purchases. The ECB conducted the first of the TLTROs during September, with the take-up being lower than expected. Despite the deployment of considerable amounts of policy stimulus from the ECB, there isn't much light on the horizon, it has to be said.
Well Pal (AKA Glenn Stevens) you do seem to have mastered the rhetoric.
Yeah Germany is certainly in the doldrums ATM, there's also underlying evidence of very poor bizness confidence which is quite simply not good stuff.
I'm glad my own Father is not mentally with it anymore to know about this, it would honestly really sadden him.
Sad times.
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$ It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do. Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy