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Euro Area Imbalances Are a Symptom of the Broader Global Imbalances

by Rebecca Wilder

Euro Area Imbalances Are a Symptom of the Broader Global Imbalances

Every year I travel to Germany to visit my in-laws, which is where I am now. Given the extra time on my hands, I’ve now mulled over a June 2012 NY Times opinion piece by Gunnar Beck. Beck displays an interesting medley of data in support of his view that Germany cannot afford to backstop the European Monetary Union (the single currency union referred to as the Euro area, or EA). Germany itself has been the loser, not the winner, of the single currency union. His comments are loosely based on the research of the Ifo Institute’s Hans-Werner Sinn.

Based on the ideas of Beck and Sinn, I start a short series on the benefits of membership in the EA, ex-post and ex-ante. The conclusion from this initial post: Some call the EA a microcosm of the world imbalances, i.e., Germany is to China as Spain is to the US. I disagree. I’d argue that the EA imbalances are a function of, rather than a mirror of, the broader global imbalances.

Let’s start by looking at the simple net trade statistics as rents derived by membership in the EA since 1999. I further Beck’s analysis on intra-EA trade (trade among the EA countries) for the original 1999 EA 11 economies. The 11 economies to meet the convergence criteria by 1999 were: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.

By definition, the trade balance is the difference between total exports and total imports, both of which are affected by relative prices and membership in the EA.

The chart below illustrates the change in the annual intra-EA trade balance as a share of GDP during the period 1999 to 2011. Spanning the years 1999-2011, intra-EA gains from the fixed exchange rate regime within the EA have been lopsided toward Spain, Portugal, and the Netherlands.

(Note: for consistency, I use the EA 17 economies as the ‘trading partner’ for the period in the chart below. Furthermore, notice that the axis points in both charts are equal for ease of comparison.)

Being a port economy, the Dutch trade ties to the EA are strong, and gains from EA trading partners have been robust, +11% of GDP spanning the years 1999-2011. Portugal and Spain have likewise benefited, however, their intra-EA net trade gains occurred exclusively since 2008. Of interest, Finland fares the worst, having seen a 5.1% (of GDP) decline in its net trade with EA partners. And Ireland, for all its praise (please see current account stats on Ireland here ), saw its intra-EA net trade decline by 5% of GDP while in the EA – admittedly, there’s been a 4.2% of GDP gain in net trade with the EA since 2008.

Who are the winners of intra-EA trade spanning the entirety of the Euro Area? As demonstrated above, not many countries. The gains from trade came primarily from net exports from developed economies outside the EA (while I do not include a country breakdown, the large net importers are the developed economies – see the IMF WEO database).

The chart above illustrates the change in the annual total trade balance (extra- plus intra-) of the EA 11 as a share of GDP spanning the period 1999 to 2011. Here, the gains from trade are a bit less lopsided and the ‘usual suspects’ are evident. Germany was the third best performing economy by this measure, where net trade increased an average of 2.8% of GDP over the period. The Netherlands benefited the most of the EA 11; but the improvement was based exclusively on intra-EA trade. Portugal experienced gains from net trade from the rest of the world and the EA, where the total trade balance improved by 3.2% of GDP (again, exclusively in the post 2008 period).

Of note, France performed poorly on both counts: intra- and total net trade, -3.2% and -4.9% of GDP, respectively. In contrast, Germany performed relatively well. Being the largest economies in the EA, and given that the absolute value of the total trade balances (either deficit or surplus) exceed that of their respective intra-EA balances, I hypothesize that the global imbalances exacerbated, even caused, the EA imbalances.

Thus, EA imbalances are not a microcosm of the broader global imbalances, rather a symptom of global trade policy.

Rebecca Wilder

crossposted with  The Wilder View…Economonitors

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Germany the Euro winner?

Update: This post from 6/28 has been re-posted today 7/04 as I believe it was lost in last Thursday’s reaction to the Supreme Court’s ruling on the health care ACA. Robert Waldmann has also subsequently expressed an opinion on how Germany should proceed.

The NYT carries a data filled op-ed by Gunnar Beck, and takes a stance not widely discussed in media (at least from a quick survey). Assuming the figures are reasonably accurate,   and knowing there are ins and outs to the idea not in the article,  what about it?

…Those who think that Germany has been a winner with the euro almost always rest their case on Germany’s export surpluses. The euro created stability; it eliminated exchange rate risks; appreciated less than the Deutsch mark would have, and thus aided German exports.

But has the euro benefited Germany more than other countries?

According to my calculations, based upon the federal statistics, German exports rose most — by 154 percent — to the rest of the world; by 116 percent to non-euro E.U. members; and least of all, 89 percent, to other euro zone members. In 1998 the euro zone still accounted for 45 percent of all German exports; in 2011 that share had declined to 39 percent.

Between 1995 and 2008, Germany saved more than most, yet it exhibited the lowest net investment rate of all O.E.C.D. countries. On average, from 1995 to 2008, 76 percent of aggregate German savings (private, governmental and corporate) were invested abroad.

There is more of course, so it is worth a visit to see his complete reasoning.

Certainly worth a discussion, and has implications for domestic economic reform in Germany.  Does it have implications for Germany’s needs in the Eurozone?

Update 2: Also see The euro without Germany by Anatole Kaletsky (Inside the Markets, Business section, June 29.

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Exchange rate pegs getting a new look?

This article at Voxeu reminded me that exchange rate pegs might come back in vogue. Voxeu has an article on the “trilemma” of ’emerging’ economies:

Do sterilised interventions allow countries a way around the fundamental trilemma of international finance by providing them with a means of systematically affecting exchange rates independent of their monetary policies? Japan, Switzerland, and China provide some lessons…

The fundamental trilemma of international finance maintains that a country cannot simultaneously peg an exchange rate, maintain an independent monetary policy, and permit free cross-border financial flows (Feenstra and Taylor 2008). At best, only two of the three are feasible.

Lifted from a note, Rebecca Wilder writes in an informal e-mail:

I found it rather difficult to read. But this idea of trilemma is not broadly applicable to developed markets except Switzerland – they did address that. I don’t know, the one thing that I do notice, is that the trade ‘imbalances’ are not really moving back into ‘balance’ neither in Europe nor globally. Thus, something’s gotta give at some point; I suspect that it’ll be exchange rate pegs.

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EA Balance of Payments: the Current Account

by Rebecca Wilder

EA Balance of Payments: the Current Account

I’ve been doing quite a bit of research on the balance of payments flows within the Euro Area (EA). Given the complexity of the balance of payments, there are too many angles to tackle in one post. Therefore, spanning the next week I will dedicate my commentary to the EA balance of payments. In this post, we start with square one: the current account.

The Euro area (EA) current account

Often times I hear comparison of the EA sovereign debt crisis to past emerging market balance of payments crises. This is not correct, since the EA runs only mild current account deficits, -0.9% of total EA GDP as of Q2 2011 (Q3 data reported in December). There’s no need for a sharp revaluation of the euro to drive the balance of payments to its identity – remember, the current account (CA) + capital account (KA) + official reserves + errors/ommissions = 0.

The standard emerging market-style balance of payments crisis goes something like this: large current account deficits must be financed by foreign inflows of capital (financial account surpluses), so that the currency comes under pressure when foreigners lose confidence in said emerging market economy. As foreign capital flows start to reverse, the currency comes under pressure to balance the financial and current accounts. Under currency depreciation, relative costs rise (via imported goods), so the central bank ‘defends’ the level of the currency through FX intervention (they sell down FX reserves and buy the domestic currency). With the central bank’s stock of FX reserves depleting quickly, speculators can sell the domestic currency for much longer than the national central bank can buy up those assets. Eventually, the whole thing comes crashing down. The currency depreciates (quite materially in some cases) and brings the current account into balance.

The EA initial condition for a balance of payments crisis is just not there: the current account is, well, rather ‘balanced’. Within the EA, country-level current accounts are well out of balance. This is the central theme associated with the EA sovereign debt crisis: debtor countries are reliant on foreign inflows of capital from the credit countries to support current spending.

The chart above illustrates the 4-quarter moving average current account deficit (red)/surplus (green) as a % of national GDP ending in Q2 2011.

In the context of the standard balance of payments crisis, Greece and Portugal would/should have seen precipitous nominal FX depreciation by now. In contrast, the Netherlands or Germany would have seen significant appreciation. However, the single currency union prevents nominal depreciation, so the focus has been on real depreciation. The debtor countries are forced into a policy of internal devaluation (fiscal austerity, they call it) to shift relative prices and real exchange rates. This could work if global growth was going gangbusters, but it’s not.

These imbalances are no longer sustainable.

I’ll leave you with a link as to the direction we’ll be headed here on The Wilder View. Last month Thomas Mayer released a report titled Euroland’s hidden balance-of-payments crisis, which describes imbalances building in the EA financial flows. Next post we’ll look into the balance of payments flows within the EA.

originally published at The Wilder View…Economonitors

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Baby Steps

By Rebecca Wilder

Baby Steps

In the FT today, Martin Wolf discusses the symbiotic relationship of global creditors and debtors. According to the September 2011 IMF World Economic Outlook, China ran the largest current account surplus in 2007, while the US ran the largest current account deficit (in $). Well, if this creditor-debtor relationship is to become more ‘balanced’, then evidence of success should stem from these two giants.

Progress has been made. The IMF forecasts China’s 2011 current account surplus will be broadly unchanged since 2007 (in levels $). In contrast, the 2011 US current account deficit is expected to have improved by 35% compared to 2007 levels. It’s baby steps toward a more balanced global capital market place. What’s driving this? Primarily the real exchange rate.

The chart below illustrates the real effective exchange rates for China and the US, as measured by a broad set of trading partners and relative inflation. The BIS releases this data. Notably, the Chinese economy experienced real appreciation coincident with US real depreciation (I chose the colors pink and blue for consistency with the ‘baby steps’ theme). Spanning the years 2005 – current, the Chinese yuan appreciated 25% in real and trade-weighted terms, while that of the US dollar depreciated 14%.

Progress is being made.

Filed under: China, Global Imbalances, Real Exchange Rates, USA

Originally published at The Wilder View…Economonitors

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Beyond tax cuts and stimulus

Marty Hart-Landsberg in Monthly Review states the issue of trade policy has a larger context than national economies. Reader juan adds his commentary to Marty Hart-Landsberg quotes (lifted from comments and slightly editied for readability):

Most importantly, foreign capital now plays a leading role in the Chinese economy, especially in manufacturing.7 Its activity has transformed China into an export-driven economy: the ratio of exports to GDP climbed from 16 percent in 1990 to over 40 percent in 2006, with the share of foreign produced exports growing from 2 percent in 1985 to 58 percent in 2005 (and 88 percent for high-tech exports).8 Equally noteworthy, the share of total exports being produced by 100 percent foreign-owned firms has also soared.

This restructuring cannot be understood simply through a nation-state lens. Rather, as China’s reforms proceeded over the 1990s, Chinese accumulation dynamics became increasingly dependent on transnational corporate investment and export activity. As a consequence, the Chinese economy became more and more enmeshed in a broader process of East Asian restructuring—one that was driven by the establishment and intensification of transnational, corporate controlled, cross-border production networks, which linked and collectively reshaped all the economies involved. In other words, the Chinese experience, and in particular, its export drive, can only be understood in the context of broader capitalist dynamics.

Chinese exports are really Chinese only in the sense that they were assembled in China. This point is reinforced by the fact that China’s increased share of the U.S. deficit was matched by a decline in the share accounted for by the rest of East Asia.

Juan re-states: It is not so much a question of the US. v China but government that are in dependent partnerships with ‘no-longer-national’ capital — which ultimately boils down to labor v capital, and this capital must control or be the state.

Given decades of class war from above, it is at least slightly more obvious what must be done.

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The real trade deficit collapsed in June — plunging from -$45,992 million to -$54,136 billion ( 2005 $). I have not done the calculation, but this will generate a significant downward revision of the second quarter real GDP report. Remember, BEA does not have this data when they do the first GDP report.

The plunge was driven by a 5.2% jump in real nonpetroleum imports although petroleum imports also rose 1.9%. Since the May 2009 bottom, real nonpetroleum imports have risen some 31.9%. Real petroleum imports are up 8.9% over the same period. Real exports fell 1.6% and as the charts makes obvious they have been flat in recent months — they are actually down 1.5% from their March 2010 peak. This should force forecasters to significantly revise their growth forecast down as what looked like a strong rebound in exports late last year now appears to be faltering.

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The Great Trade Collapse…VoxEU

Richard Baldwin at VoxEU introduces a new book on “great trade collapse” before the WTO meeting occurring shortly.

Re-posted with attribution:

The Great Trade Collapse

World trade experienced a sudden, severe and synchronised collapse in late 2008 – the sharpest in recorded history and deepest since WWII. VoxEU today posts a new Ebook – written for the world’s trade ministers gathering for the WTO’s Trade Ministerial in Geneva – that presents the economics profession’s received wisdom on the collapse. Two dozen chapters, written by leading economists from across the planet, summarise the latest research on the causes of the collapse as well as the consequences and prospects for recovery.

The world’s trade ministers gather at the WTO next week just as the world’s trade is starting to recover from the “great trade collapse” – the sharpest drop in recorded history and deepest since WWII.

Vox has today posted an Ebook “The Great Trade Collapse: Causes, Consequences and Prospects” that aims to tell the world’s trade ministers what economists’ know about the trade collapse.

The Ebook can be downloaded for free from

Hard copies of the book may be ordered by emailing Anil Shamdasani:

Establishing consensus on the cause

The two dozen chapters establish a consensus on what caused the collapse. In a nutshell, it was caused by the sudden postponement of purchases, especially of durable consumer and investment goods. Trade fell far more than GDP, since the demand shock was amplified by “compositional” and “synchronicity” effects.

•“Compositional effect”: In the 4th quarter of 2008 and 1st quarter of 2009, the Lehman-induced ‘fear factor’ caused consumers and firms around the world – but especially in the US and EU – to freeze; expenditures were postponed until things became clearer. The sales/production of “postponeables” plummeted, dragging down GDP growth rates. However, since the composition of GDP places much lower weight on postponeables than the composition of trade, the same shock had a substantially larger impact on trade than it did on GDP; the lion’s share of trade takes place in manufactures, mostly final durable consumer and investment goods, and related parts and components.

•“Synchronicity effect”: National drops in trade were large – many attaining post-war records – but the world trade drop was much larger than previous episodes, since almost every nation’s trade dropped sharply; there was no averaging out this time. The synchronisation was probably due to the global and instantaneous transmission of the ‘fear factor’, and partly due to the development of international supply chains that reacted “just in time” to the collapse in demand for postponeables.

Other factors
Some of the chapters find evidence for supply-side factors, but other do not. The supply shocks considered include: the impact of the credit crunch on the specialised financial instruments that grease the gears of international trade (e.g. letters of credit), bankruptcy-induced disruptions of international supply chains, and protectionism.

The best available evidence suggests that declines in global trade finance have not had a major impact on trade flows. Policy responses aimed at shoring up trade credit were early and massive; these may have prevented credit from being more of a problem than it was.

There is no evidence that protectionism played a direct role so far; there has been plenty of new protection, but is has been applied to small trade flows.

Finally, there is almost no evidence that supply chains have collapsed. Direct evidence from firm-level data shows that the exits of firms from trade relationships (i.e. the extensive margin) has not played an important role in this crisis.

If the global economy recovers, the recovery of global trade – which seems to have started in mid-2009 – is likely to be rapid, with pre-crisis growth rates being reached next year. This could foster growing imbalances.

Several authors warn that the global imbalances are a problem for the trade system as well as for the macro and financial system. As unemployment in many nations is projected to rise, or at least remain high, pressures for a protectionist backlash could grow over the coming year or two. To avoid this, and to prevent laying the foundations for another global crisis down the road, the US, China and other nations with large trade imbalances should undertake the necessary macroeconomic adjustments, such as exchange rate realignments, and designing credible plans for long term fiscal sustainability.

This article may be reproduced with appropriate attribution. See Copyright (below).

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