{"id":70894,"date":"2015-04-10T07:28:21","date_gmt":"2015-04-10T11:28:21","guid":{"rendered":"http:\/\/countingpips.com\/?p=70894"},"modified":"2015-04-10T07:28:21","modified_gmt":"2015-04-10T11:28:21","slug":"outside-the-box-germanys-trade-surplus-is-a-problem","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/04\/outside-the-box-germanys-trade-surplus-is-a-problem\/","title":{"rendered":"Outside the Box: Germany\u2019s Trade Surplus Is a Problem"},"content":{"rendered":"
April 10, 2015<\/div>
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By John Mauldin<\/h4>\n
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In Code Red<\/em><\/a> I wrote a great deal about trade imbalances among the various European countries, which were at the heart of the European sovereign debt problem. As the peripheral countries have tried to rebalance their trade deficits with Northern Europe and especially with Germany, they have seen their relative wages fall and deflation become a problem. Greece is the poster child.<\/p>\n

The north-south imbalance in the Eurozone is still a problem today. In this week\u2019s Outside the Box<\/em>, I highlight a recent blog on that topic from none other than former Fed Chairman Ben Bernanke. He first published his blog on March 30, and it appears he is going to post to three times a week. It\u2019s a very thoughtful commentary, and I will admit to having subscribed. He is going back to his \u201cprofessor\u201d style and communicates very clearly.<\/p>\n

I find it useful to get a handle on what the economic elite are thinking and discussing, and Bernanke\u2019s blog is going to be one of the ways I can keep up. His ongoing debate with Larry Summers over secular stagnation is fascinating, although I think they both miss the point on structural growth. Monetary policy and fiscal policy lag behind other drivers of growth in terms of importance.<\/p>\n

That fact was brought home to me at lunch today, when Woody Brock met me over at Ocean Prime for some fish and wisdom. Woody is simply one of the smartest economists on the planet and knows the gamut of the literature as well as anyone. \u201cIt\u2019s the incentive structure that is the driver,\u201d he told me; \u201cthat\u2019s what I was trying to explain in my recent debate with Larry Summers.\u201d There are times when I wish I could just be a fly on the wall, and that would have been one of them.<\/p>\n

Everyone responds to incentives, no matter what the country or type of government. Setting incentives to maximize entrepreneurial activity will produce the most growth and jobs. Of course, it is always a balancing act.<\/p>\n

It is my day for friends coming to Dallas. Tonight Steve Moore (WSJ <\/em>and now with the Heritage Foundation) is in town for a speech, and he is hanging around to go to the Dallas Mavericks game with me. We\u2019ll talk productivity and politics over steaks at Nick and Sam\u2019s before we head to the game and again after the game at his hotel, where, randomly, my doctor, Mike Roizen (chief wellness officer at the Cleveland Clinic) is also staying the night for a speech. So a little health and politics late at night. What a great day.<\/p>

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You have a great week as well, and think through what Bernanke is saying. Do you really think Germany will follow through on his suggestions, as reasonable as they are? Me neither. Europe is well and truly hosed. They have just not figured out yet that they need to hit the reset button. Not just on monetary or fiscal policy (which are secondary), but on the entire incentives (regulations and labor-reform) environment.<\/p>\n

Your incentivized to give you the best I can analyst,<\/p>\n

John Mauldin, Editor
\nOutside the Box<\/em>subscribers@mauldineconomics.com<\/a><\/p>\n

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Germany’s Trade Surplus Is a Problem <\/strong><\/span><\/h2>\n

By Ben S. Bernanke
\nApril 3, 2015<\/p>\n

In a few weeks, the International Monetary Fund and other international groups, such as the G20, will meet in Washington. When I attended such international meetings as Fed chairman, delegates discussed at length the issue of \u201cglobal imbalances\u201d\u2014the fact that some countries had large trade surpluses (exports much greater than imports) and others (the United States in particular) had large trade deficits. (My recent post<\/a> discusses the implications of global imbalances from a savings and investment perspective.) China, which kept its exchange rate undervalued to promote exports, came in for particular criticism for its large and persistent trade surpluses.<\/p>\n

However, in recent years China has been working to reduce its dependence on exports and its trade surplus has declined accordingly. The distinction of having the largest trade surplus, both in absolute terms and relative to GDP, is shifting to Germany. In 2014, Germany\u2019s trade surplus was about $250 billion (in dollar terms), or almost 7 percent of the country\u2019s GDP. That continues an upward trend that\u2019s been going on at least since 2000 (see below).<\/p>\n

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Why is Germany\u2019s trade surplus so large? Undoubtedly, Germany makes good products that foreigners want to buy. For that reason, many point to the trade surplus as a sign of economic success. But other countries make good products without running such large surpluses. There are two more important reasons for Germany\u2019s trade surplus.<\/p>\n

First, although the euro\u2014the currency that Germany shares with 18 other countries\u2014may (or may not) be at the right level for all 19 euro-zone countries as a group, it is too weak (given German wages and production costs) to be consistent with balanced German trade. In July 2014, the IMF estimated that Germany\u2019s inflation-adjusted exchange rate was undervalued by 5-15 percent (see IMF, p. 20<\/a>). Since then, the euro has fallen by an additional 20 percent relative to the dollar. The comparatively weak euro is an underappreciated benefit to Germany of its participation in the currency union. If Germany were still using the deutschemark, presumably the DM would be much stronger than the euro is today, reducing the cost advantage of German exports substantially.<\/p>\n

Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country\u2019s domestic spending, including spending on imports.<\/p>\n

In a slow-growing world that is short aggregate demand, Germany\u2019s trade surplus is a problem. Several other members of the euro zone are in deep recession, with high unemployment and with no \u201cfiscal space\u201d (meaning that their fiscal situations don\u2019t allow them to raise spending or cut taxes as a way of stimulating domestic demand). Despite signs of recovery in the United States, growth is also generally slow outside the euro zone. The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.<\/p>\n

Persistent imbalances within the euro zone are also unhealthy, as they lead to financial imbalances as well as to unbalanced growth. Ideally, declines in wages in other euro-zone countries, relative to German wages, would reduce relative production costs and increase competitiveness. And progress has been made on that front. But with euro-zone inflation well under the European Central Bank\u2019s target of \u201cbelow but close to 2 percent,\u201d achieving the necessary reduction in relative costs would probably require sustained deflation in nominal wages outside Germany\u2014likely a long and painful process involving extended high unemployment.<\/p>\n

Systems of fixed exchange rates, like the euro union or the gold standard, have historically suffered from the fact that countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure. The gold standard of the 1920s was brought down by the failure of surplus countries to participate equally in the adjustment process<\/a>. As the IMF also recommended in its July 2014 report, Germany could help shorten the period of adjustment in the euro zone and support economic recovery by taking steps to reduce its trade surplus, even as other euro-area countries continue to reduce their deficits.<\/p>\n

Germany has little control over the value of the common currency, but it has several policy tools at its disposal to reduce its surplus\u2014tools that, rather than involving sacrifice, would make most Germans better off. Here are three examples.<\/p>\n

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  1. Investment in public infrastructure. Studies show<\/a> that the quality of Germany\u2019s infrastructure\u2014roads, bridges, airports\u2014is declining, and that investment in improving the infrastructure would increase Germany\u2019s growth potential. Meanwhile, Germany can borrow for ten years at less than one-fifth of one percentage point, which, inflation-adjusted, corresponds to a negative real rate of interest. Infrastructure investment would reduce Germany\u2019s surplus by increasing domestic income and spending, while also raising employment and wages.<\/li>\n
  2. Raising the wages of German workers. German workers deserve a substantial raise, and the cooperation of the government, employers, and unions could give them one. Higher German wages would both speed the adjustment of relative production costs and increase domestic income and consumption. Both would tend to reduce the trade surplus.<\/li>\n
  3. Germany could increase domestic spending through targeted reforms<\/a>, including for example increased tax incentives for private domestic investment; the removal of barriers to new housing construction; reforms in the retail and services sectors; and a review of financial regulations that may bias German banks to invest abroad rather than at home.<\/li>\n<\/ol>\n

    Seeking a better balance of trade should not prevent Germany from supporting the European Central Bank\u2019s efforts to hit its inflation target, for example, through its recently begun quantitative easing program. It\u2019s true that easier monetary policy will weaken the euro, which by itself would tend to increase rather than reduce Germany\u2019s trade surplus. But more accommodative monetary policy has two offsetting advantages: First, higher inflation throughout the euro zone makes the adjustment in relative wages needed to restore competitiveness easier to achieve, since the adjustment can occur through slower growth rather than actual declines in nominal wages; and, second, supportive monetary policies should increase economic activity throughout the euro zone, including in Germany.<\/p>\n

    I hope participants in the Washington meetings this spring will recognize that global imbalances are not only a Chinese and American issue.<\/p>\n

    Like\u00a0Outside the Box?<\/em>
    \n    Sign up today<\/a><\/span> and get each new issue delivered free to your inbox.
    \nIt’s your opportunity to get the news John Mauldin thinks matters most to your finances.<\/strong><\/p>\n

    Important Disclosures<\/em><\/strong><\/a><\/p>\n<\/div>\n

    The article Outside the Box: Germany\u2019s Trade Surplus Is a Problem<\/a> was originally published at mauldineconomics.com<\/a>.<\/div>\n
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