Recent Updates

  • US: Intl Investment Position (Q2), Advance Trade & Inventories (Aug)
  • Albania: Tourism, Monthly Inflation Expectations, Public Finance (Aug)
  • US: Pending Home Sales Index (Aug)
  • Brazil: PPI (Aug)
  • more updates...

Economy in Brief

Germany's Trade and Current Surpluses Continue to Rise
by Robert Brusca  November 8, 2013

It was controversy large German current account deficit part of the release of December figures on trade. Now with exports growing strong in September imports dropping trade surplus as surge in higher Germany is going to feel even more pressure fellow EMU members for its growing trade imbalance. German exports rose by 1.7% in September and imports fell by 1.9%. With this combination of strong exports and weak imports, German trade balance rose to ?18.81 billion euros from ?15.79 billion euros in August.

Sequential growth rates the story that is equally disturbing more disturbing the standpoint of evaluating future German trade surpluses are supposed to look like. Three months German goods exports are rising to 7.9% annual rate of 4.6% over six months and 0.9% pace over 12 months.

That result to the strength of imports on the same horizon. Over three months imports are falling at a 6.3% annual rate. Over six months import growth is under 1%, as imports are advancing at a 0.7% annual rate. Over 12 months imports are contracting by 2%. Why isn't the strength in the German economy reflected in rising imports?

You can see the strength in exports in the rising ratio exports and imports. Exports are 125.4% of imports in September 2013. This is up from 124.4% of imports 12 months ago and 117.9% of imports 24 months ago. Germany's economy is recovering, but it is another case of export-led growth with a rising German trade surplus. German exports are thriving on foreign demand while Germany, the largest economy in EMU, is piggybacking its growth on the domestic demand in other nations, some of them struggling fellow EMU members.

This is where German success begins to look a bit `unfair.' The European Commission has some metrics to determine if surpluses and deficits are too big. The table below looks at a group of countries the Commission singled out in December 2012.

The EU Commission has a Macroeconomic Imbalance Procedure which is triggered by an Alert Mechanism Report as the excepted passage below describes:

"The Commission monitors current account surpluses and deficits under the Macroeconomic Imbalance Procedure (MIP), which was introduced in December 2011. Its aim is to identify, prevent and correct harmful imbalances by ensuring that appropriate policy responses are adopted in Member States in a coordinated manner. The issues that fall under the scope of the MIP are wider than the external accounts, but the current account deficits and surpluses feature prominently in the procedure. The starting point of each round of the MIP is an Alert Mechanism Report (AMR), in which the Commission identifies Member States whose macroeconomic situation needs further scrutiny through an in-depth review. The analysis in the AMR is based, inter alia, on a scoreboard of eleven macroeconomic indicators. One of them is the three-year average of the current account balance as a percentage of GDP, with an indicative threshold of +6% and -4%. The asymmetry reflects the fact that the risks in connection with current account deficits are higher than for current account surpluses" (source can be found here).

The EU Commission sets triggers for launching these procedures (as described above) whose limits already are being violated. Yet there is no announcement of any investigations being initiated.

A ratio of current account surplus to GDP of over 6% is supposed to be a trigger for a report. Yet as the table above shows EMU members Germany, The Netherlands and Luxembourg have been over this line for the last four quarters on average. And over the last 14 quarters Germany's four quarter average has exceed this mark without exception. The same is true of The Netherlands. Luxembourg has been in violation for 11 of these 14 quarters (again, based on the four-quarter average).

Moreover since 2004-Q4 Luxembourg's surplus ratio has AVERAGED 8.2%, The Netherlands has AVERAGED 7.7% and Germany's surplus ratio has AVERAGED 6.24%. Austria has AVERAGED an acceptable but still high 2.8%. Outside the Monetary Union but still in Europe, Sweden has an average surplus ratio for this period of 7.2% and Denmark of 4.3%.

The European Commission right now is whistling past the grave yard. Under the old Maastricht (pronounced: Mass-Trick) criterion, Germany and France were supposed have had excess fiscal deficit procedures launched against them. But they pleaded themselves as a `special case' and used their power to undermine the procedure. The bite of the rule was eliminated, to detriment of the entire Community. Is the EU Commission doing this again?

In its report on excess current account surpluses the EU Commission is very pragmatic in its assessment of the countries it inspects. It notes that we can't be too precise in thinking that we know what a country's deficit or surplus position should be. Countries have different circumstances as well as different tastes to saving and borrowing. But (the Commission does not say this) neither should we let this lack of precision keep us from making any determination or using sound judgment.

Saudi Arabia is this case of country that SHOULD be permitted to run a large current account surplus. Its revenues form its oil riches are just too steady and too big while the country is too small to be expected to spend all its revenue.

China, once a large underdeveloped country, could have been excused for running large current account deficits, given its need to develop. Instead, China kept it exchange rate artificially low by hoarding foreign exchange reserves. These reserves were accruing some of the lowest returns available on planet, instead of being used for development domestically.

Of course we know why China did this. It was very interested in controlling the process of development for political purposes. Its ratio of consumption to GDP plunged as China `developed' further. China abused its standing as a developing country. It used its leverage with many multinational corporations located there who lobbied their home countries so that they could reap the benefits of their own direct foreign investment in China. China is a very good example of a county `allowed' to run surpluses that have proved to be unhealthy for it.

In a nutshell, China attracted investment that was geared to exploit foreign demand. Then the financial crisis hit the developed countries hard. It revealed their unstable and exaggerated debt positions- for debt both private and public sectors. This led to a slowdown and has left China with the wrong investment. China can longer bootstrap its growth to exports. It can't be done by denying the pressure of a US Treasury secretary. The problem is now grass roots. US growth has slowed. Europe's growth has slowed. No one can absorb China's exports anymore as they did in the past. So now China must develop its own domestic demand. Since China grew based on its wage advantage it now has a conundrum. China cannot develop its own domestic demand without paying workers more (which it is doing). But doing that will erode its competitive position. China has some special problems too. But this wage/competiveness issue is one of the concerns that transfers to Germany.

Germany and EMU may not have the same threat to their economics as China did by ignoring some basic facts. But the EU Commission has a bad record when comes to ignoring its own rules by superimposing its own judgment. Luxembourg is a small county that thrives off being a banking center is it not the problem. The Netherlands too is small nation with many trans-shipments crisscrossing its borders. It seems to be less of an issue too.

But Germany is the Big Enchilada. And while you may not be able to assert causation, one country's surplus IS another country's deficit (or a deficit spread among a group of them). If countries were evaluated in EMU according their position in a queue off fellow nations instead of relative to the EMU norm, Germany would be the outlier more often than not. But because of Germany's weight it substantially IS the eurozone. Its economic results are always close to EMU norms. That is why its particular excess cannot go unaddressed. Germany is just too big to ignore. To ignore what its huge trade surpluses are doing to fellow members would be a crime.

large image