Tuesday, April 15, 2014

Absurdity of the Week: Germany Could be Fined by the EU for its Trade Surplus

by Pater Tenebrarum

April Fool's Day Has Become a Permanent Feature

There must be something in the water. After the world was forced to endure the almost physically painful nonsense emanating from various Japanese officials on the alleged benefits of its clearly failing monetary debasement program, it is the EU's turn to prove it is run by a bunch of economically illiterate nincompoops (to put it as politely as possible).

They are complaining about Germany, the only country that actually still has the economic strength to possibly keep the rickety euro zone from blowing sky high should the debt crisis return. Specifically, they are complaining about the fact that people the world over love to buy German products, while Germany's citizens concurrently like to save, which leads to Germany sporting a large trade surplus. The other side of this trade surplus are of course Germany's capital exports and investments abroad, about which we have as of yet heard no complaints uttered by anyone.

According to the Telegraph, the EU may even end up imposing a fine on Germany for having a trade surplus.

“Germany's current account surplus will smash all records this year, risking a serious political showdown with Brussels and the ultimate sanction of EU fines.

A joint report by the leading German institutes, or "Wise Men", said the country's external surplus would keep rising to a modern-era high of 7.9pc of GDP this year, far above the 6pc limit set by Brussels under the new Macroeconomic Imbalance Procedure.

The Commission warned Germany late last year that it faced possible sanctions if failed to do its "homework", either by boosting consumption at home or by weaning its economy off excess reliance on foreign markets. The threat caused consternation in Germany's press and a vitriolic exchange with Brussels.

The rest of the eurozone can order Germany to present an "action plan" to bring down its surplus. If Germany is relegated to the "corrective" phase of the mechanism, and if it then fails to deliver on demands, the EU Council of Ministers can then demand that Germany pay a deposit of up to 0.1pc of GDP. This money is seized if Berlin still fails to remedy the imbalance.

"We are looking under the bonnet at the German economy and monitoring this closely. If there is systematic abuse, and they don't respond, sanctions are available," said an EU official. The fines are imposed by a "reverse qualified majority vote", making it hard to block.”

(emphasis added)

This actually leaves one almost speechless. Say what? What are Germany's policymakers supposed to do? Brainwash their citizens into consuming more? Get them to produce shoddy products nobody wants to buy? What?

Arrant Mercantilist Nonsense

The Telegraph continues (hang on to your hat, it gets even more bizarre, with US treasury spokesmen adding their 2 cents as well):

“Such a procedure would amount to a court of judgment on Germany by EU peers, with explosive political consequences. The German public already think they are the cash cow for the EU, convinced they are bearing the cost for bailing out southern Europe and holding the euro together. Berlin says Germany's export success helps all Europe and should be prized, not denigrated.

Germany first agreed to the new procedure thinking it would be used to punish deficit countries living beyond their means, or to prevent credit booms, deemed to have been the causes of the EMU crisis. German officials seem taken aback that Brussels would also look at the other side of the North-South trade gap.

The US Treasury is also stepping up pressure. It singled out Germany as a greater sinner than China in its latest report on trade and currency manipulation, criticizing the country for failing to do more to lift the eurozone out of a protracted slump. Washington said Germany was creating a “deflationary bias” for the world economy, taking more than its fair share of scarce global demand.”

(emphasis added)

First of all, 'Berlin' is not a person and cannot 'say' anything and neither can 'Washington', unless George Washington has become a Zombie and risen from the grave. Even then he would probably only say stuff like 'more braaaaiiiins' or 'send more cops'. But we will let this slide. Whoever voiced the above opinion in Berlin is of course 100% correct. Germany's economic success indeed helps all of Europe and should be prized. It is after all the only thing that has made the bailout of the euro-zone's deadbeats possible in the first place!

It is also erroneous to believe that the funds Germany earns through its export surplus are somehow 'lost' to the rest of the world (an implicit accusation that follows from the complaints). The exact opposite is true. Since Germany's citizens are avid savers, the surplus gets reinvested all over the show – with Europe and the US both recipients of large German investments (as noted above, they have yet to complain about that).

Moreover, it is simply long-refuted mercantilist nonsense that is at the root of the  bellyaching about the trade surpluses or deficits of other nations. 'Nations' don't trade with each other – individuals do. If people the world over were not expecting to profit from the exchanges they engage in with people in Germany, they would simply not engage in them. It follows logically that there can be nothing inherently bad about the situation. The fevered minds of mercantilists (mercantilism isn't even an economic 'theory' – it is just pure hokum) have been wrong about this since the 17th century. The main question should actually be: why has this arrant nonsense still not been eradicated?

What is almost more bizarre than all of this is 'Washington' lamenting about Germany's alleged role as a 'currency manipulator'. Have these people been imprisoned in a parallel universe over the past 13 years? Just asking.

However, just in to be safe, here is a message for them: Germany no longer has a currency of its own. Instead it uses the currency issued by the nominally independent ECB, called the euro. Die German mark is unfortunately gone.

Not only is Germany unable to 'manipulate its currency', but even if it were, the complaint would still be misguided, as the euro has been strengthening relentlessly against both the dollar and the yen for about 1 ¾ years.  In other words, German goods have become quite a bit more expensive on international markets, but for some reason people still seem to prefer buying them anyway.


Contrary to the dollar and the yen, the euro has been in a relentless uptrend since July 2012 – via StockCharts – click to enlarge.

It is also economic folderol to accuse Germany of 'creating a deflationary bias for the world' (and not because German exports have actually become more expensive).

Germany's officials have precisely zero influence on the monetary policies of other countries. They cannot order the Fed to print more or less money, nor can they order the central bank of any other country to behave in a particular way. They cannot even do that with their 'own' central bank, which is the central bank for the entire euro zone. There is nothing Germany's leadership can do about the 'inflationary' or 'deflationary' biases of central banks in other nations, and as far as we are aware, there is not a single central bank in the entire world that has anything but an inflationary bias. A 'deflationary bias' therefore doesn't even exist, and if it did exist, it would not be the fault of German officials (actually, if such a thing did exist, we'd have to stop the presses and throw a party or something).

The accusation that Germany is 'depriving other countries of demand' is something already addressed above: Germany's trade surpluses aren't disappearing into a mysterious black hole. They are reinvested in other countries. Guess what, that activity is actually creating 'demand' there.

All of this is not to say that there is no room for improving Germany's economic policies. There definitely is plenty that could be done, starting with ditching the plans for a minimum wage mooted by the governing coalition to placate its socialist half. Next on the menu would be deep spending cuts accompanied by equally deep tax cuts, to name just a few ideas. There is plenty of bureaucratic red tape that could be removed as well, which could be combined with shrinking the government bureaucracy. What no-one in Germany needs to do is try to talk the ECBs board into doing something crazy. It is perfectly capable of doing that on its own.


The Western world's economic policymakers are groping in the dark when it comes to understanding basic economic concepts. In essence, they cannot be differentiated from 17th century French mercantilists. It hurts to think that tax payers are forced to pay the (quite generous) salaries of these people. It is high time the entire bunch were sent out to find a real job and do something productive for a change. There would be no need to replace them with anyone else. Instead one should strive to institute a free, unhampered market economy. It may actually be worth trying for a change.

See the original article >>

No comments:

Post a Comment

Follow Us