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Tuesday, April 10, 2012



                                     The First Problem:

 Germany's Vulnerable Dependence on Export-Driven GDP Growth

1. The German export-performance, admirable as it is, depends in large measure on the shared euro among all 17 member-countries in the Eurozone. How so?

Tersely put, by being in the Eurozone, German firms are able to export their products at a highly competitive currency rate --- not just outside the Eurozone, but inside it too.  That's because the "real" exchange rate between Germany and the 16 other member-countries in the Eurozone is lower for Germany than for almost any of its trade-partners inside it in "purchasing power parity" terms.   

What does the "real" exchange rate of a national currency mean?  Well, it contrasts with the "nominal" exchange rate that prevails in foreign exchange markets, as when you're in Germany and go into a bank and exchange $US for Euros.  What the "real" exchange rate does is take into account the different price and wage rates that prevail across countries trading with one another

Here's a concise definition taken from this site:  The  real exchange rate refers to the  . . .

‘. . .  purchasing power of two currencies relative to one another. While two currencies may have a certain exchange rate on the foreign exchange market ---[buggy: that exchange rate called the "nominal" rate] -- this does not mean that goods and services purchased with one currency cost the equivalent amounts in another currency. This is due to different inflation rates with different currencies. Real exchange rates are thus calculated as a nominal exchange rate adjusted for the different rates of inflation between the two currencies'   

And also, prof bug adds, adjusted additionally for different wage levels too in the production of similar goods and services. 

Click on the continue button.

2. The Real Exchange Rate Clarified in More Concrete Terms

Start with the Eurozone. The "nominal" exchange rate for all 17 member-countries in Euro-terms is 1 to 1. One Euro used in Germany equals one Euro in Austria or France or Finland and so on, just like the $US is the same in Virginia and in California. But --- a key point --- thanks to different price and wage levels for the same goods produced in the Eurozone, Germany --- with its low inflationary rates and frozen wage-raises since the early 1990s in export and import-industries --- has a cheaper "real exchange rate" than is found in the nominal value of the Euro used by almost all of Germany's Eurozone trade-partners.

One result: These 16 Eurozone trade partners of Germany buy 40% of all German exports. And a major reason is that the real exchange rate of the German Euro isn't 1 to 1 with the French or Italian or Spanish Euro. In real terms, it's "cheaper".  The reason should be self-evident by now.  A cheaper national currency, all other things aside (such as, say, high quality automobiles that Germans produce) --- boosts German export sales and, oppositely, reduces import purchases by German firms and households.

A second important result:  Germany, by exporting goods and services in a currency used by 16 other countries, not only has a far more competitive "real" exchange rate with most of its Eurozone trade-partners, it also maintains a far more competitive exchange rate for exporting to dozens of other countries around the world. Otherwise, you see, if the Deutschmark (DM) were still the German currency ---with a German Central Bank to boot --- the DM's nominal and real value in foreign-exchange markets with the US$. the British pound, the Yen, and so on would rise continually in lock-step with the German export surpluses.

In the upshot, sooner or later ---even possibly in the course of a year or two (unless Germany's trade partners were all booming and sucking in imports from around the world) ---the hypothetical DM currency would rise so high in foreign currency markets that Germany's current-account surpluses would fall off drastically or even disappear on a global basis. That's the underlying thrust of a flexible exchange-rate system, used by almost all the member countries of the OECD.   

3. Is There a Theoretical Exception in the Hypothetical Case of a Restored German National Currency (the DM)? 

Yes, though very unlikely to materialize.  Specifically, the German Central Bank could try to manipulate the DM's value in the Chinese manner . . . meaning that it would constantly take the $US or restored French Franc or British Pounds or Italian Lire and so on that German companies earned from their export sales, buy those currencies from those companies with the DM --- more likely, from the banks used by those companies ---then turn around and use those currencies to buy financial assets of its major trading partners with their currencies that flow into their banking system through Germany's export surpluses.  Such manipulations would seek, as they have in China, to maintain the national currency (the DM) from surging in value in foreign exchange markets in  order to keep German export-led economic growth thriving.

Fortunately, this kind of currency finnagling would be very unlikely to occur.  Even the Japanese Central Bank --- along with the other Central Banks in the OECD member-countries --- has given up such fiddling as a big distortion in the long run to a market economy's performance.

4. Want the Nitty-Gritty Proof for These Assertions?

Well, consider the following figures: For all of the year 2011, with 16 other members using the Euro and one Central Bank for all 17 countries, the Eurozone's overall balance of payments current account --- trade in goods and services of various sorts with the rest of the world (including other non-Eurozone EU countries) --- added up to a negative $76 billion or so.  Yes, the entire Eurozone of 17 countries had a deficit in its current account of about $76 billion! 

By contrast, Germany's current account surplus for the same year with the entire world --- including the other 16 Eurozone member-countries ---has been estimated by the CIA World Factbook to be over $200 billion for 2011, hundreds of times higher than the overall Eurozone deficit!  And that huge overall Eurozone deficit includes the $200 billion surplus in Germany. 

Holy Toldedo!

What follows?  Despites its soaring current account surpluses since 2008, The German-used Euro didn't skyrocket in foreign exchange markets with the rest of the world, including the rest of the Eurzone.  With a large current account deficit for all 17 member states, the Euro used by Germany stayed very competitive worldwide.  For the whole year, the Euro actually declined against the Eurozone's major trade partners in Europe, North America, Asia, and elsewhere.  In the upshot, thanks to the highly competitive Euro in foreign currency markets, around 50% of Germany's rate of GDP growth since 2008 has been export-led.  By contrast, as prof bug's comments left at The Economist noted, China's overall current account on a global basis was being cut almost in half compared to the go-go years earlier in the decade. 

--- Sidebar Clarification: China's global trade surplus (current account) reached $296 billion in 2008. It dropped to $196 billion in 2009, then fell to $183 billion in 2010 and to $155 billion in 2011. As a share of GDP, that meant a drop from 3.1% in 2010 to 2.0% in 2011. )

Small wonder that German policymakers and many economists worry that Germany's over-reliance on export-led growth makes the country, as its Finance Minister Wolfgang Schaeuble stressed in March 2012 is "very vulnerable" to global economic trends. And to drive home the point, he added that German economic growth this year would fall off this year.



Namely, Germany's Over-Regulated, Low-Performing Domestic Markets and Relatively Low National Consumption (Private Household and Public Alike)

1 Any changes in Germany's export-led economic growth --- with all its vulnerabilities ---would require above all far more deregulation of product-markets and other service industries that are now rigidly regulated, along with incentives to much higher productivity.

As the recently published OECD Economic Survey of Germany 2012  emphasized, what with the noticeable slowdown in German economic growth in the last part of 2011, that German policymakers and private business need to find ways to "strengthen domestic demand" as the major driving force of the large and rich German economy. In particular, it recommended that:

"Reforms to foster domestic demand should focus on improving competition enhancing framework conditions for investment and innovation in Germany's domestic sector. This includes lowering the strict regulation in some services sectors, notably professional services, and improving innovation support, for example by introducing a tax credit for R&D complementing direct R&D support. In addition to raising productivity and potential growth, such reforms would also contribute to reducing the structurally high current account surplus and thus make a contribution to reducing global imbalances in a way which benefits Germany as well as others."

2. Some Concrete Clarification:

Germany has the 6th largest economy in the world, estimated by the CIA to be $3.1 trillion in Purchasing Power Parity at the end of 2011. Its per capita income (PPP-adjusted)  was $37,900, which left it ranked on that score as the 23rd highest in the world (leaving aside a handful of small oil-rich countries in the Persian Gulf area).

Then, too, in the EU with its 510 million inhabitants, Germany --- with its 80 million people --- has by far the largest economy. Britain comes in 2nd place (a GDP of $2.3 trillion and a per capita income at $35,900) and France in 3rd place with a GDP of $2.2 trillion and a per capita income of $35,000. Both these countries, along with Italy, have somewhat more than 60 million inhabitants each. Smaller EU countries like Sweden, Finland, Denmark, Austria, and Netherlands --- all of which are under 10 million except for Netherlands with 18 million people --- are richer in per capita income than Germany. Average EU per capita income is $34,000.

On a global basis, it's worth noting in passing, the USA's GDP was estimated to be $15.1 trillion at the end of 2011.  That made it the biggest national economy worldwide, and its per capita income was estimated to be $48,100 ---the fourth highest in the world, behind tiny Singapore, Hong Kong, and Norway (again, with the small oil-rich countries in the Persian Gulf omitted).  China was ranked as the world's 2nd largest economy ($11.3 trillion), but with a low $8,500 per capita income in PPP, leaving it ranked number 118 worldwide. India's GDP was ranked third largest, and its per capita income tallied $3700 and left it in 161th place. Japan edged out Germany with the 5th largest GDP but with a per capita income of $34.3 trillion or the 31st highest in the world..

3 Against this background --- a vulnerable dependence on foreign markets for export-led GDP growth at home, which in turn leans heavily for its large trade surpluses on the overall Euro's value in foreign exchange markets at a time when the Eurozone is under huge stress; not to forget the growing role of German guarantees behind the Euro rescue-plans for Greece, Italy, Spain, and Portugal --- against this background a rich large country like Germany would have all the more reason to restructure its GDP growth toward far more reliance on domestic economic demand.

As things stand, though, German domestic consumption, private and public, is unusually low by comparison with not just the USA and UK, but even in the EU with other big countries like France and Italy. Private household consumption alone in the USA and UK has been around 65% of GDP, whereas in Germany ---(as in Japan, another big country relying heavily on export-led growth -- it has averaged around 57%. (France, another rich and large EU country, has about the same private household percentage of GDP, but its government spends far more on public investment and consumption).

Note a major reason for the low level of household consumption in Germany. In effect, since the early 1990s, German wages have been largely stagnant . . . yes, more so even than in the USA. On top of that, German household heads have been noticeably reluctant to use credit cards and buy durable goods with loans. (Only to fair to add that German export-oriented firms have very recently begun to raise wages, and the German government has just announced that it will raise the wages of public servants by 6.0% this year.)

4 The Lamentable Condition of the Highly Regulated Product Markets a Final Reason for Low German consumption spending.

Fortunately, no need to say more, largely because an excellent article on the backwardness of Germany's domestic markets was recently published in the New York Times. Click here.


                                                                     AN IMPORTANT QUALIFICATION OR TWO

1. Arguably --- the argument made by lots of economists, including in various regional Federal Reserve Banks (notably the one in St. Louis) --- American personal consumption was much higher than 65% of GDP. It supposedly averaged 70% in the decade between 2001 and 2010 (compared to around 62% in the 1970s and 65% in the 1980s.) The problem here is that such a figure is bloated and made difficult for comparisons across countries.

Above all, the biggest misleading factor is that virtually all healthcare spending in the US --- which amounts to almost 18% of GDP --- is counted as part of personal consumption expenditures. This is the case, please note, even though about 50% of healthcare expenditures in that decade derived from government programs like Medicaid and Medicare. And though not all of that 50% slice goes into personal consumption expenditures in the GDP accounts handled by the BEA (the Bureau of Economic Analysis of the Commerce Department), by far most of it does so.

If you keep this point in mind, you'll find all the same a very good analysis (despite the bloated percentage of personal consumption expenditures) in this St. Louis Federal Bank post.

2. Note that the argument American personal consumption was funded too much by unwise debt in recent decades --- at the expense of national savings (and hence in lower national investment than might have been desirable) --- isn't wrong, but now somewhat outdated.

Until the 2008 crash, American household savings during the last decade were lamentably low; they averaged only 2% of disposable income. Starting in 2009, though, American households became more frugal and for the next three years their savings turned positive and averaged close between 5% and 6% of personal post-tax income, though --- the latest figure --- it fell toward 4.0%

By contrast, the qualifier above "somewhat" outdated is needed to compared the current US household savings rate with those that prevailed until the early 1980s. In the period between 1950 and 1980 or so, household savings were around 11% of disposable income. Starting in the 1980s, the savings rate then fell noticeably . . . mainly because of the ease of getting credit cards and taking out second mortgages for consumption purposes, not to forget the splurge of unwise debt during the first six years of the last decade that went into buying unfordable housing for several million Americans.  Then, too, don't forget: medical expenses --- including healthcare insurance --- were rising at a fast clip for well over two decades.   

For a good discussion of American savings and changes in our national economy --- including very recent ones since 2008 --- click here: