The German Current Account Surplus and Krugman’s and Wolff’s Critique by Georg Erber

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The German Current Account Surplus and Krugmans and Wolffs Critique

by

Georg Erber 1

Berlin

November 2013

Abstract:

Global structural imbalances in trade have become a major topic in particular after the Great financial and economic crisis in 2008. China and Germany have been running major balance of trade in goods and services as well as balance of current account surpluses in the past decade. Contrary other countries including the US on top have run major current account deficits at the same time. Now, after some time of quarreling about the global recovery this debate on how to correct for those imbalances is back on the transatlantic agenda. This time Germany is the major villain, because last year Germany current account surplus reached a 7 percent to GDP level. However, this is already rebalancing and the future new German government is planning policy measures like a major increase in public infrastructure investments, introducing a minimum wage for the whole economy, increasing public spending in education and training, which would stimulate domestic demand and growth in Germany in the coming year. This paper looks at the empirical facts of the past couple of years related to the rebalancing already under way. It confronts these findings with the harsh critique of Paul Krugman published in the New York Times, who blames German politics as the major source for the current imbalances. Looking at the facts much of the blame Krugman puts on misguided German politics cannot be confirmed to be in line with the available statistics and most recent forecasts.

Keywords: global structural imbalances, balance of current account, international trade, Euro area

JEL Classification: O19, O38, F14, F62

1 Dr. Georg Erber, German Institute for Economic Research, Mohrenstr. 58, 10117 Berlin, Germany, phone +4930 89789697, email: [email protected]


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The German Current Account Surplus and Krugmans and Wolffs Critique

by

Georg Erber

November 2013

Germany is running significant high current account surpluses for quite a long time. 2 According to IMF data it reached a peak in 2012 of about 7 percent of the German GDP. In 2013 it has started to decline and is forecasted by the IMF to reach about 6 percent. 3 The EUCommission just released a forecast for next year, which predicts for Germany a further decline to 5.6 percent in 2014. 4 Therefore the current account surplus is shrinking most likely already.

The future new government of CDU/CSU and SPD are currently negotiating on a government program for the coming years, which will significantly increase public investments in public infrastructure and most likely the introduction of a minimum wage in Germany 5 and other social adjustments to better the income position of pensioners in particular mothers who gave birth to

children before 1992. Furthermore most likely Germany will as well increase public spending on education and training.

So this new policy mix looks just like what was always demanded from outside observers like the USgovernment 6, the IMF7 and last but not least Paul Krugman 8 that Germany should take measures to

2 http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance 3 http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx 4 http://europa.eu/rapid/press release_IP 13 151_de.htm 5 http://www.dw.de/views diverge over minimum wage ingermany/a 17117399 6 http://www.treasury.gov/resource center/international/exchange rate policies/Documents/2013 10 30_FULL%20FX%20REPORT_FINAL.pdf 7 http://www.bloomberg.com/news/2013 10 31/germany strikes back at uscriticism over economic policy.html


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stimulate domestic demand instead of exports. Germany will grow next year its real GDP by about 1.7 to 2 percent. Unemployment will stay at 5.6 percent and employment will grow by 0.3 percent. Inflation will be under control at 1.7 percent in 2014. So where is the problem?

Germany has as well started to take the risk of a transition from nuclear energy and fossil fuels after

the Fukushima debacle towards a renewable energy economy. This triggers an investment spree at home to build the necessary new essential infrastructure. Something as well much hailed by the Obama administration for the US economy to foster green growth. 9 However, the US economy is now betting on fracking another high risk strategy to exploit fossil energy, i.e. shale gas, and become by this energy independent from imports abroad. The US expects even to become a major exporter of shale gas in the near future. 10 This would diminish the still high looming current account deficit of the US economy. At the same time it creates jobs urgently needed to bring down the high US unemployment rate.

Another hope, the deep water oil drilling, has experienced a major setback with the oil spilling in the

Gulf of Mexico which cost the US severe environmental damages and the US economy a fortune. 11It has to be seen which strategy better payoff in the future. Currently the impression is that the US is green washing a lot of their activities but at the same time serves the interest of the big US oil companies.

Beacon of stability in the Euro area

The German economy is the beacon of stability inside the Euro area during the last years of the crisis lending credibility and support to those member countries in deep trouble via the ECB Target2 system, the EFSF/ESM and other direct and indirect support measures. Without this support the Euro

area would

have

already

seized

to

exist.

A

collapse

of

the

Euro

would

have

had

major

repercussions

on the global economy anf the US in particular. So how it does come that Germany is the bad guy instead of the good guy from a transatlantic perspective? Enough is not enough?

Does German trade harm the US economy?

The outrage in the US over the German trade surpluses over the past years is misguided. Germany has run a trade surplus in the bilateral trade with the US of 36 bill. Euro in the year 2012 and of 18 bill. Euro in the first six months of 2013. Taking the USGDP as a reference point in 2012 of 12.148 bill. Euro this was a miniscule share of less than 0.3 percent. Hardly anything to be outraged as unsustainable trade surplus or beggar thy neighbor policy to the US economy. The EU overall trade surplus in 2012 with the US was 86.1 bill Euro. 12 Therefore about 50.1 bill Euro originated not from Germany but other EUmember states.

If you take the US GDP as a reference point this accounts for a meager 0.3 percent share directly attributable to the German trade surplus. If you take the US balance of trade deficit of last year of 3.1 percent of the US GDP this accounts for less than one tenth of the US trade deficit. Germany had

8 http://www.nytimes.com/2013/11/04/opinion/krugman those depressing germans.html?_r=0 9 http://www.oecd.org/greengrowth/ 10 http://www.piie.com/publications/pb/pb13 6.pdf 11 http://en.wikipedia.org/wiki/Deepwater_Horizon_oil_spill 12 http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113465.pdf


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a net surplus foreign direct investment to the US in 2012 of 5.3 bill. Euro. 13 This contributed to setup most likely to create production sites like automotive 14 plants 15 , etc. and by this creating jobs in the US. Subtracting these FDIs from the 36 bill. Euro surplus in trade in goods and services with the US would reduce the perceived negative impact of Germany on the US economy even further to a little more than 30.7 bill. Euro. So whats the point? Much ado about nothing?

German FDIs in the US lead to higher US imports from Germany in particular from the German machinery industry, but at the same time creates jobs in the US from those direct investments. German car manufacturers most visibly as exporters of goods in the US produce more cars abroad than in Germany. 8.35 mill. cars were manufactured in 2012 abroad and 5.4 mill. cars at home. Only 625,000 cars were exported from Germany to the US. Since this industry together with the machinery industry is the key export industry of Germany this does not account for the overall average of Germany exports but it is just the peak most visible performing industry.

It is true that Germany as the largest and internationally most open economy of the EU has a larger

share than the rest of the EU member states if one takes the respective GDP as a benchmark. But Germany has always been an economy deeply involved in global trade for more than a century.

Does German trade surplus harm the Euro area crisis countries?

A common fallacy in the current debate is that one takes a simplistic look on the aggregate current surplus of Germany opposite the other Euro area countries. Germany has had an overall current account surplus to GDP of about 7 percent in 2012. The overall surplus of the EU is only 0.3 percent. Does this mean that Germany runs surpluses only inside the EU? Obviously not!

Germany has a current account surplus outside of the EU member countries which adds up to 38 percent while the remaining 62 percent emerge inside the EU. Contrary the other EU member countries run huge balance of payment and trade deficits in particular with China 16 and oil rich countries. Germany has for example exports of goods to China of 66.6 bill. Euro in 2012 and imports from China of 77.7 bill Euro. Leaving a small deficit of 11.1 bill Euro. The overall EU member countries, however, are running a trade deficit of 146 bill. Euro. So a significant amount of the trade deficit has to do with the Chinese exports of goods to EU member countries excluding Germany.

13 http://www.bundesbank.de/Redaktion/DE/Downloads/Veroeffentlichungen/Statistische_Sonderveroeffentlichungen/Statso_10/statso_10_bestandserhebung_ueber_direktinvestitionen_2013.pdf?__blob=publicationFile 14 https://www.bmwusfactory.com/manufacturing/production overview/ 15 http://www.economist.com/news/business/21582517 americas car workers union seeks foot door vwsplant lets gogerman 16 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2294857


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Table 1 Balance of current account as percent of GDP

If we look at the bilateral current accounts of Germany with the PIIGScountries we notice that the balance of trade and services between those countries has swung from a significant surplus for Germany in 2007 of 33 bill. Euro into a small deficit of 1.2 bill Euro in 2012 (see table 2).

Therefore the PIIGScountries now have a trade surplus opposite of Germany and no trade deficit any more. Not such a bad accomplishment for them. Therefore it is incorrect to blame Germany for living at the expense of the Euro area crisis countries through huge exports driven by low wages is incompatible with the facts. Germany instead has expanded its exports of goods and services towards other countries abroad like the BRICS17 and to some extent to the US in particular. However, if one begins to look at the relative burden those countries face from Germany exports it seems not to lead to significant structural global imbalances there. German exports to China e.g. have been shrinking in the first half of the year 2013 by 5.5 percent. 18 So the slowing growth in China from double digit towards about 7.5 percent this year has been complemented by a similar decline of German exports there.

17 http://econpapers.repec.org/article/diwdiwdeb/2012 103.htm 18 http://econpapers.repec.org/article/diwdiwwob/80 41 3.htm

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EU (27 countries) -1 -0,2 -0,3 -0,4 -0,8 -1,3 -1,1 -2,1 -0,7 -0,5 -0,3 0,3

Euro area (17 countries) -0,4 0,6 0,3 0,8 0,1 -0,1 0,1 -1,5 -0,2 0,0 0,2 1,2

Belgium 3,4 4,5 3,4 3,2 2,0 1,9 1,9 -1,3 -1,4 1,9 -1,1 -1,4

Bulgaria -5,5 -2,4 -5,3 -6,4 -11,6 -17,6 -25,2 -23,1 -8,9 -1,5 0,1 -1,3Czech Republic -5,1 -5,3 -6,0 -5,1 -1,0 -2,0 -4,3 -2,1 -2,4 -3,9 -2,7 -2,5

Denmark 3,1 2,5 3,4 3,0 4,3 3,0 1,4 2,9 3,4 5,9 5,6 5,2

Germ any 0,0 2,0 1,9 4,7 5,1 6,3 7,4 6,2 6,0 6,2 6,2 7,0Estonia -5,2 -10,6 -11,3 -11,3 -10,0 -15,3 -15,9 -9,2 3,4 2,9 2,1 -1,2

Ir eland -0,6 -1,0 0,0 -0,6 -3,5 -3,5 -5,4 -5,7 -2,3 1,1 1,1 4,9

Greece -7,2 -6,5 -6,5 -5,8 -7,6 -11,4 -14,6 -14,9 -11,2 -10,1 -9,9 -3,1

Spain -3,9 -3,3 -3,5 -5,2 -7,4 -9,0 -10,0 -9,6 -4,8 -4,5 -3,7 -1,1

France 1,7 1,0 0,4 0,5 -0,5 -0,6 -1,0 -1,7 -1,3 -1,6 -1,9 -2,3

Croatia -3,0 -7,3 -6,1 -4,1 -5,2 -6,6 -7,1 -8,7 -4,9 -0,8 -0,8 0,1

Italy 0,3 -0,4 -0,8 -0,3 -0,9 -1,5 -1,3 -2,9 -2,0 -3,5 -3,1 -0,7

Cyprus -3,3 -3,8 -2,3 -5,0 -5,9 -6,9 -11,7 -15,6 -10,7 -9,8 -4,7 -11,7

Latvia -7,7 -6,7 -8,2 -12,9 -12,6 -22,5 -22,4 -13,2 8,6 2,9 -2,1 -1,7

Lithuania -4,7 -5,1 -6,7 -7,6 -7,1 -10,6 -14,4 -12,9 3,7 0,1 -3,7 -0,5

Luxembourg 8,8 10,5 8,1 11,9 11,5 10,4 10,1 5,4 7,2 8,2 7,1 5,6Hungary -6,1 -7,0 -8,0 -8,3 -7,2 -7,4 -7,3 -7,3 -0,2 1,1 0,8 1,6

Malta -3,7 2,3 -3,0 -5,8 -8,5 -9,5 -6,2 -4,9 -7,4 -4,7 -0,2 0,4

Netherlands 2,6 2,6 5,5 7,6 7,4 9,4 6,7 4,3 5,2 7,8 10,1 9,9

Austria -0,8 2,7 1,7 2,2 2,2 2,8 3,5 4,9 2,7 3,4 1,4 1,8

Poland -3,1 -2,8 -2,5 -5,3 -2,4 -3,8 -6,2 -6,6 -3,9 -5,1 -4,9 -3,5

Por tugal -10,3 -8,2 -6,4 -8,3 -10,3 -10,7 -10,1 -12,6 -10,9 -10,6 -7,0 -1,5

Romania -5,5 -3,3 -5,9 -8,4 -8,6 -10,5 -13,4 -11,6 -4,2 -4,4 -4,5 -4,0

Slovenia 0,2 1,0 -0,8 -2,6 -1,7 -2,5 -4,8 -6,2 -0,7 -0,6 0,0 2,3

Slovakia -8,3 -7,9 -5,9 -7,8 -8,5 -7,8 -5,3 -6,2 -2,6 -3,7 -2,1 2,3

Finland 8,4 8,5 4,8 6,2 3,4 4,2 4,3 2,6 1,8 1,5 -1,5 -1,9

Sw eden 5,0 4,7 6,9 6,6 6,8 8,4 9,1 9,1 6,7 6,8 7,0 7,1

United Kingdom -2,1 -1,7 -1,6 -2,1 -2,6 -3,4 -2,4 -1,3 -1,4 -3,3 -1,3 -3,7

Norw ay 15,3 12,7 12,3 12,7 16,2 17,1 13,9 17,5 13,1 12,2 12,8 14,3

Macedonia : : -4,0 -8,1 -2,5 -0,4 -7,1 -12,9 -6,8 -2,0 -3,0 -3,9

Turkey 2 -0,3 -2,5 -3,7 -4,6 -6,1 -5,9 -5,6 -2,2 -6,2 -9,7 -5,9

United States -3,9 -4,3 -4,7 -5,3 -5,9 -6 -5,1 -4,7 -2,7 -3,3 -3,1 :

Japan 2,1 2,8 3,2 3,7 3,6 3,9 4,9 3,3 2,9 3,7 2 :

Quelle: Eurostat. DIW 2013


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Table 2 Balance of Payments of Germany with the PIIGScountries, 2007 2012.

Exports Imports Balance Exports Imports Balance Revenues Payments Balance

in Mill. Euro in Mill. Euro in Mill. Euro

2007 6.356 17.417 11.061 3.076 3.492 416 11.477 7.123 4.718 2.405 250 9.322

2008 5.560 16.126 10.566 3.397 3.795 398 10.964 7.634 4.043 3.591 129 7.502

2009 3.715 13.983 10.268 3.058 3.637 579 10.847 5.421 3.070 2.351 90 8.586

2010 4.230 14.226 9.996 3.276 4.560 1.284 11.280 6.007 2.821 3.186 157 8.251

2011 4.378 12.472 8.094 3.117 5.402 2.285 10.379 5.283 3.275 2.008 7 8.378

2012 4.743 9.950 5.207 3.041 5.406 2.365 7.572 5.951 1.856 4.095 49 3.526



2007 7.959 2.142 5.817 965 3.862 2.897 2.920 2.219 192 2.027 571 4.376

2008 8.079 2.162 5.917 1.071 2.911 1.840 4.077 2.357 157 2.200 562 5.715

2009 6.640 1.784 4.856 942 3.178 2.236 2.620 2.372 90 2.282 597 4.305

2010 5.836 1.944 3.892 978 3.181 2.203 1.689 1.976 61 1.915 630 2.974

2011 5.039 1.983 3.056 904 3.448 2.544 512 2.031 148 1.883 607 1.788

2012 4.722 1.899 2.823 996 3.278 2.282 541 2.120 237 1.883 627 1.797



2007 47.830 20.786 27.044 4.710 9.937 5.227 21.817 12.471 2.221 10.250 886 31.181

2008 42.654 20.903 21.751 5.186 10.222 5.036 16.715 12.399 1.249 11.150 978 26.887

2009 31.295 19.336 11.959 4.222 9.414 5.192 6.767 10.307 1.242 9.065 954 14.878

2010 34.461 22.426 12.035 4.815 9.748 4.933 7.102 9.153 505 8.648 1.020 14.730

2011 34.994 23.017 11.977 4.831 10.177 5.346 6.631 9.070 1.518 7.552 819 13.364

2012 31.532 23.314 8.218 4.969 10.289 5.320 2.898 8.980 1.385 7.595 857 9.636



2007 8.318 3.954 4.364 914 1.253 339 4.025 2.944 458 2.486 168 6.343

2008 8.161 4.017 4.144 1.056 1.407 351 3.793 2.579 383 2.196 192 5.797

2009 6.197 3.432 2.765 973 1.046 73 2.692 2.131 171 1.960 196 4.456

2010 7.776 3.946 3.830 961 1.091 130 3.700 2.260 155 2.105 242 5.563

2011 7.005 4.616 2.389 1.038 1.133 95 2.294 2.072 256 1.816 209 3.901

2012 6.195 4.834 1.361 1.012 1.356 344 1.017 2.463 350 2.113 195 2.935



2007 64.760 45.208 19.552 5.997 9.919 3.922 15.630 12.406 12.194 212 1.164 14.678

2008 62.434 47.922 14.512 6.293 10.371 4.078 10.434 11.341 1.383 9.958 1.141 19.251

2009 51.241 38.320 12.921 5.578 9.202 3.624 9.297 8.869 5.587 3.282 1.310 11.269

2010 59.163 42.959 16.204 6.286 9.734 3.448 12.756 8.468 3.630 4.838 1.793 15.801

2011 62.670 49.340 13.330 6.459 10.182 3.723 9.607 9.436 3.922 5.514 1.520 13.601

2012 56.456 50.285 6.171 6.527 10.799 4.272 1.899 9.974 4.419 5.555 1.491 5.963



2007 135.223 89.507 45.716 15.662 28.463 12.801 32.915 37.163 19.783 17.380 3.039 47.256

2008 126.888 91.130 35.758 17.003 28.706 11.703 24.055 36.310 7.215 29.095 3.002 50.148

2009 99.088 76.855 22.233 14.773 26.477 11.704 10.529 29.100 10.160 18.940 3.147 26.322

2010 111.466 85.501 25.965 16.316 28.314 11.998 13.967 27.864 7.172 20.692 3.842 30.817

2011 114.086 91.428 22.658 16.349 30.342 13.993 8.665 27.892 9.119 18.773 3.162 24.276

2012 103.648 90.282 13.366 16.545 31.128 14.583 1.217 29.488 8.247 21.241 3.219 16.805

Source: German Bundesbank, Juli 2013. DIW 2013

Balance of current

transfers

Balance of current

transfers

Balance of current

transfers

Balance of current

transfers

Balance of current

transfers

Balance of current

transfers

Ireland

Goods (fob) Services (fob) Balance of trade in goods and services

Income and wealth transfer payments Balance of the Current Account

in Mll. Euro in Mill Euro in Mill. Euro

Greece

Balance of the Current Account



Spain


Income and wealth transfer payments



Services (fob)

in Mill. Euroin Mill Euro

Italy

Goods (fob)

in Mill. Euro in Mill Euro in Mill. Euro


Balance of trade in goods and services



Services (fob)

in Mill. Euro

Portugal

PIIGScountries



in Mill. Euroin Mill Euroin Mill. Euro


Goods (fob) Balance of trade in goods and services



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Looking at the numbers of the PIIGScountries the consolidation process with regard to the balance of payments and balance of trade has progressed significantly during the past five years. Therefore it is not a surprise that the Euro area is not anymore suffering from a balance of payment crisis of those countries as in 2010. There has been unsurprisingly a price to be paid for this adjustment. The previous high growth of those countries has ended in deep recessions and high unemployment. But there is little empirical evidence from other current account crisis countries around the world in the past that this is not a common unwarranted byproduct of excessive spending before. Consolidation has always been painful.

Does Germany hurt the EU or Euro Area with its exports?

Even looking at the overall data for bilateral current accounts of Germany for the whole EU27 and Euro area there is no empirical evidence for the claims that Germany has not steadily reduced its current account balance and trade balance opposite both country groupings. The current account surplus of Germany of the EU27 excluding Germany of cause sank from 113.5 bill Euro to 90.6 bill.

Euro. In the Euro area the current account shrank from 99 bill. Euro in 2009 to 59 bill. Euro in 2012.

Table 3 Balance of Payments of Germany with the EU27 and the Euro area, 2009 2012.

So Germany experienced a significant decline of his surpluses in is current accounts as well as in trade. That Germany, however, the overall current account surplus at the high level of 7 percent is

only due to exports in to the emerging and developing countries in particular. It has nothing to do with beggar thy neighbor policy inside the EU and inside Euro area in particular. Germany contributed to the consolidation process in the Euro area by reducing its surpluses. That is how markets work.

Intratrade, Extratade or What?

Furthermore the German overall current account surplus of 7 percent of the German GDP is based on national trade statistics of Germany by adding up extra and intratrade inside the EU, i.e. a European common market. About 62 percent of the trade surplus of the German economy in 2012 emerges from trade inside the EU, i.e. intratrade. This leaves a meager 38 percent current account surplus for extratrade with countries outside the EU. Splitting up the German current account surplus between that emerging from intratrade and extratrade surplus this would divide the 7 percent overall surplus



2009 524.834 411.358 113.476 92.181 110.608 18.427 95.049 127.836 88.513 39.323 20 .8 59 1 13 .5 13

2010 606.260 482.882 123.378 96.368 114.957 18.589 104.789 134.404 107.021 27.383 25 .7 11 1 06 .4 61

2011 670.441 554.756 115.685 101.631 121.538 19.907 95.778 141.479 109.629 31.850 22 .9 59 1 04 .6 69

2012 675.132 570.516 104.616 105.030 127.202 22.172 82.444 138.350 104.652 33.698 25.562 90.580



2009 356.996 274.246 82.750 55.542 74.060 18.518 64.232 101.746 64.477 37.269 4.701 96.800

2010 400.872 317.116 83.756 58.199 77.981 19.782 63.974 98.873 81.545 17.328 6.029 75.273

2011 435.140 358.788 76.352 62.735 82.052 19.317 57.035 104.498 84.787 19.711 4.595 72.151

2012 431.475 366.153 65.322 64.850 86.218 21.368 43.954 100.219 79.833 20.386 4.899 59.441

Source: German Bundesbank, Juli 2013. DIW 2013

EU27




Euro Area



Balance of current

transfers

Balance of current

transfers




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to 4.76 percent of intratrade surplus and the remaining 2.24 percent for extratrade surplus. This extratrade surplus would meet even the standard of the Geithner rule that balance of trade surpluses of the major G20 countries should not exceed the 5 percent to GDP benchmark. Similarly Germany would also meet the 5 percent threshold if we consider the intratrade inside the EU separately.

Germanys Intratrade Surplus inside the EU

Some of the critics outside the EU still perceive the EU as an economic union of national economies. However, the EU itself perceives the EU common market not this way because it just separates intra and extratrade even in the collection of the EU trade statistics. This even causes problems when one tries to maintain the principle of country of origin and country of destination in the EU trade statistics. Since trade inside the EU common market is considered to be something like domestic trade, it is not reported as foreign trade.

To put

this

idea

of

intratrade

of

the

EU

into

perspective

of

the

US

as

a similiar

common

market.

In

the

USA domestic trade from New York to California is domestic trade not foreign trade. A similar consideration is the underlying reasoning of the EU as a common market. Trade between EU member states is considered intratrade not foreign trade, e.g. between Germany and France or any other EU member country. Since there are no custom borders between these countries the EU customers only collect information when goods cross one outside border with a foreign country and the export papers give information of the country of destination and the respective value of the exports. Data on intratrade cannot be collected by custom organizations inside the EU intratrade anymore. There is a reporting system which gives information from the company in the country of origin sending goods to a country inside the EU common market directly to Eurostat and the national statistical offices. If

there are intermediaries like whole sale traders ordering goods from countries inside the EU they are the destinations where the companies are sending their products. If the whole sale trader sells these goods towards other companies outside the EU this transaction creates a new now foreign trade operation without taking reference to the previous transaction inside of the EU. In particular Rotterdam is a major habor for oil imports from countries like Saudi Arabia, Libya, etc. The oil is going onshore in Rotterdam and goes there to a refinery which produces from this gasoline, etc. This is sent to neighboring countries like Germany, Switzerland or France upstream the Rhine River by boat or trucks. All these operations are accounted as intratrade. Therefore the foreign trade statistics have a unique way of accounting trade completely different what is common outside the EU countries like the US or Japan.

As soon as a commodity or service crosses the border of one EU member country from abroad the trade is registered as import or export from the EU towards the particular country of destination. This leads to the well known Rotterdam effect. Since Rotterdam is one of the major harbors were goods from the EU and into the EU are landed onshore, the Netherlands are taking credit for those exports and imports in their national trade extratrade statistics. Since this biases the extratrade data upwards of the Netherlands. Since a major part of the extratrade of the EU neighbor countries is travelling abroad is transported via Rotterdam it is not easy possible to attribute the respective intratrade data to the single EU member states as de facto extratrade.

The German Federal Statistical Office, however, still collects information to maintain the origin destination principle in the national German foreign trade statistics. This, however, makes the trade


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data published by the German statistical office incompatible with those published by Eurostat. The major difference is the Rotterdam effect since a significant amount of exports from Germany to foreign countries outside the EU is travelling via Rotterdam down the Rhine River.

The high intratrade surplus of Germany of 4.76 percent of the German GDP may be of some concern

to the EU member states, but could not worry the other countries outside the EU. So taking the 7 percent of GDP as a benchmark for international structural imbalances of Germany is highly myopic.

Furthermore there is a common legend resulting from a false interpretation of the total current account surplus of Germany that commentators like e.g. Paul Krugman and many others always assume that the EU is the only area where Germany is running a current account surplus. Looking at the overall current account surplus of the EU with the rest of the world, the EU has only a minor current account surplus of 0.3 percent of the EU GDP. Since Germany has a surplus of 7 percent some observers like Krugman conclude that this surplus emerges only inside the EU which is obviously not the case.

Furthermore some critiques of the German policy take the total current account deficits of the Euro area crisis countries (Portugal, Italy, Ireland, Spain and Greece PIIGS) and adding them up opposite the total current account surplus of Germany to prove the claim that Germany has to take the major responsibility for their current account troubles. Nothing is less true than this if we look at the most recent current account data.

After an artificial boom of the PIGGScountries triggered by historically exceptional low nominal interest rates after joining the Euro area, the current account deficits have come down steadily from all together 33 bill. Euro in 2007 to a small surplus of 1.2 bill Euro in 2012 (see table 2 in my previous

paper on

this

issue

).

So

in

particular

the

current

account

deficit

of

the

PIIGS

countries

literally

has

opposite Germany has literally disappeared. This adjustment process has been painful for these countries because it forced the countries to live by its means.

However, there is no statistical evidence that Germany is still strangling these countries by its export machine and keeping them depressed through this mechanism. This conjecture is simply a mirage because those in favor for it did not understand the intricacies of the European statistical system. They simply use their macroeconomics 101 knowledge to interpret the European statistics in a textbook manner. This, however, is grossly misleading or plainly wrong.

The only problem in need of closer scrutiny with German surpluses in current accounts relates to those of the remaining EUmember countries excluding the PIIGS. Surprisingly up to now nobody of these countries to my knowledge has been complaining about the extraordinary surpluses of the German current account there. Why?

Balance of gross exports and imports or balance of value added in trade?

There is another fundamental problem with the current trade statistics. The account only for gross exports and gross imports but not look at the real value added embodied in those exports and imports. Whats wrong with this?

Well, we

have

now

more

and

more

globalized

value

chains.

So

a more

and

more

significant

part

of

gross export and imports included reimports and reexports from other production locations outside the respective country. This leads to significant double counting. If e.g. a German car manufacturer


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like VW exports parts to his plant in Slovakia form Germany. This would count as intratrade in the EU statistics. If after using those parts from Germany in Slovakia together with parts manufactured in Slovakia to manufacture the next step product in the value chain, i.e. a motor, and reexports this back to Germany to be assembled there to a complete car like the VW Golf, this would again be counted in total as exports and imports respective between both countries. Nowadays, value chains have become even more complex, so this is simple illustration of what really is going on.

What really would matter if one would look for the advantages and disadvantages of trade would not be the measure the gross import and export values, but instead the value added in the different countries. Luckily the OECD together with the WTO has started an initiative to calculate value added trade statistics by countries instead of the misleading gross exports and imports data. In this paper I will not explore this direction in greater detail because this will happen in another paper in the near future. My conjecture at this stage of my research is however, that a significant amount of the intratrade of the EU measured currently by gross exports and imports give a misleading picture on the implicit value added traded in a global value chain. Correcting for this would lead to lower value added to GDP numbers compared to the current gross values for all countries. If one accepts that what really matters is the balance of value added in foreign trade, i.e. the surplus and deficit, one would have a completely different benchmark.

The EU commission has just recently started such an investigation with regard to Germany in particular. I would highly recommend using the value added to GDP ratios as benchmarks there to come to more reasonable conclusions as is currently the case based on the gross balance of trade data. My suspicions is that using the gross intratrade data for exports and imports the role of Germanys surplus is highly overblown simply because German is now after the Eastern enlargement of the EU lying in the center of Europa. Therefore a huge amount of trade is crossing Germany and due to complex value chains between the more and more integrating European common market creates a statistical illusion that Germany runs huge trade surpluses inside the EU because of double counting intratrade between Germany and the other member countries.

A tale of two consolidation strategies

Something the US just beginning to learn is that consolidation of excessive trade and current account deficits is unavoidable after trying to stimulate their economy with huge public deficit spending and ultra light monetary policy in the coming years. This has kept the US economy growing faster in the meantime since 2009, the day of reckoning of fiscal consolidation is still now lying ahead. After the

fiscal sequester took hold at the beginning of 2013 and the federal US government has already experienced a shutdown in Fall and a constant ongoing quarrel at the US Congress how to balance the federal budget the still looming high deficits in the future, it has to be seen, if the European consolidation strategy over the past years was such a bad thing as many American politicians and economists like Krugman have claimed.

In particular Paul Krugman has been a very prominent critique of German economic policy over the last couple of years 19 because they did not follow his advice.

There has been before a debate on how to bring down global structural imbalances before at G20

meetings. Timothy Geithner, the former US Secretary of the Treasury, has recommended at the G20

19 http://krugman.blogs.nytimes.com/2013/11/01/the harm germany does/?_r=0


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meeting in Toronto in 2010 that countries with current account surpluses above 5 percent of GDP should take policy actions to bring this down below this threshold. At the same time those with a current account deficit of more than 5 percent of their GDP should take actions to increase their exports. 20 At this time China and Germany were the major opponents against this Geithner rule. The G20meeting finally agreed in 2010 on a more detailed investigation on the global imbalance issue and to derive global imbalance indicators. 21 The debate has not gone very far from there. 22 In particular Chinas has major reservations about the appropriate exchange rate indicator. 23

Recently China has claimed that their export data are flawed because of false billing practicing, which overstated official Chinese statics on foreign trade, i.e. the real exports, significantly. 24 By correcting the official Chinese export statistics in spring this year, China meets the 5 percent Geithner threshold leaving Germany as the only major villain of the G20.

Last but not least Barack Obama announced in 2010 for the US a target that the US should double its exports until the end of 2014. 25 Currently it looks as if the US will not meet this target. This could

become a topic next year. Since this is already a year of mid term election it could cause further trouble for the embattled US government.

Lets return to Krugman critique on German economic policy.

What are Krugmans major arguments?

The creation of the euro was followed by the emergence of huge imbalances, with vast amounts of capital flowing from the core to the periphery. Then came a sudden stop of private capital flows, forcing the peripheral nations to eliminate their current account deficits, albeit with the process slowed by the provision of official loans, mainly through loans among central banks. The really bad news for the periphery is that so far the adjustment has taken place mainly through depressed economies rather than regained competitiveness; so the counterpart of that improvement for Spain is 25 percent unemployment.

This is plainly wrong. It is surprising that Krugman just take such a selective view to take Germany and Spain instead of the whole Euro area instead (see Figure 1).

20 www.g20.utoronto.ca/analysis/2010toronto 101114.pdf 21 http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp78.pdf 22 http://unctad.org/en/docs/presspb20111_en.pdf 23 http://www.khaleejtimes.com/darticlen.asp?xfile=data/business/2011/February/business_February307.xml&section=business 24 http://www.bloomberg.com/news/2013 04 08/china export data skepticism deepens from goldman to nomura.html 25 http://www.chinaglobaltrade.com/fact/us exports data and obama national export initiative plan double exports 2014


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Figure 1 Overall current account balances as % of GDP, Germany and Spain, 1999 2012.

Source: Krugman 2013.

From this Krugman concludes that Spain has had to carry the whole adjustment burden while Germany was free riding. A look at the data in table 2 above would lead to a different conclusion. Germany was not living at the expense of Spain, but redirected its trade from the PIIGScountries which never played such a crucial role like other regions of the world for German trade. 26 In particular China together with the BRICS and to some extent the US was compensating the German

trade losses inside the Euro area.27

However, Krugman ignores this shift in German exports and suggests from his simple bilateral comparison using the total current account surpluses of both countries, that

Normally you would and should expect the adjustment to be more or less symmetrical, with surplus countries reducing their surpluses as deficit countries reduced their deficits. But that hasnt happened. Germany hasnt adjusted at all; all of the rise in peripheral European current accounts has taken place at the expense of the rest of the world.

Sorry Paul, you are comparing apples with pears. The current account balance between Germany and Spain declined since 2007 from 31.2 bill. Euro to 9.6 bill Euro in 2012. The balance of trade declined from 21.8 bill Euros to 2.9 bill Euros. This is symmetrical as one would expect in a bilateral trade and current account balance. Well whats wrong with this? If demand falters in one country like Spain it rise in another for German goods and services, why should German stop its industry for servicing the global demand, where it becomes effective?

However, Krugman concludes from this:

26 https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Aussenhandel/Handelspartner/Tabellen/RangfolgeHandelspartner.pdf?__blob=publicationFile 27 http://econpapers.repec.org/article/diwdiwdeb/2012 103.htm


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And thats a very bad thing. We are still in a world ruled by inadequate demand, and very much subject to the paradox of thrift. By running inappropriate large surpluses, Germany is hurting growth and employment in the world at large. Germans may find this incomprehensible, but its just macroeconomics 101.

Thats a pure myopic value judgment. Of cause in a global economy there are always winners and losers when global demand and supply are shifting from some goods and services to others and from one region to another. Germany (5.5 percent GDP growth in 2009) like Japan (5.1 percent GDP growth in 2009) took the major beating in their economies when global growth collapsed in 2009. It is part of the story how markets work. At this time Krugman was not complaining about the bad luck of the German economy.

As a possible defense of the Germany government Krugman suggests:

You might argue that its not the German governments fault that it runs surpluses but youd be

wrong. (Ive

fallen

into

this

trap,

but

acknowledged

the

error.)

For

one

thing,

Germany

has

pursued

fiscal austerity despite its creditor status, contributing to an overall tightening of policy in the eurozone. And one way to think about Germanys role within the euro is that it is in effect engaging in huge foreign exchange intervention via Target 2, which holds down the shadow Deutsche Mark.

Firstly, he accepts the basic argument, that the German government is not managing German trade. Secondly, however, he blames the German government that it has forced austerity on the crisis countries of the Euro area. This is not as obvious as he claims. 28 Austerity is an illdefined term, which is used as a catch phrase in the political struggle how an imbalanced economy should consolidate. My observation using official statistics published by Eurostat and the EUCommission do not reveal

that governments

of

the

PIIGS

countries

have

cut

their

total

government

spending

significantly

over

the last couple of years taking the pre crisis levels of 2007 or even the peak levels in 2009 as a benchmark. Not governments were cutting back their spending but they were raising their revenues from the private sector through tax hikes and lowering wages, pensions and salaries to use these savings for paying their interest bills from their public debt. These consolidation policies were executed in the respective countries sometimes under the guidance of the troika (ECB, EUCommission and IMF). The German government was involved in this process but it was not directing the whole process. Germany always strictly has and had to accept the sovereignty of the national governments. The specific adjustment policies were the outcome from complex negotiations between the different stakeholders. There was no German dictator, named Angela Merkel, who

ordered those countries to do so. A little less polemic from Krugman would help to get the facts right instead playing a blame game.

Since the private capital markets became unwilling to finance these government debts at reasonable interest rates the ECB took over a huge amount of the liabilities via the Target2 mechanism. Furthermore the refinancing of their public debt took place via the EFSF/ESM funding at extremely low non market interest rates. Germany and the people therefore suffer huge interest income losses. If according to data published by Eurostat on the Macroeconomic Imbalances Procedure Scoreboard Headline Indicators, 1 November 2012 Table 2 29 is running a net overall international investment position of 32.6 as percentage of GDP, this means that the creditor country is forgiving a huge

28 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2226319 29 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/MIP_NOV_2012/EN/MIP_NOV_2012 EN.PDF


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amount of interest revenues towards the crisis countries in the Euro area in particular. Germany has and is playing by this directly via EFSF/ESM and indirectly via the ECB with Target2 and other government asset purchase programs its role as lender of last resort. It makes implicitly huge transfer payments through these for Germany unfavorable arrangements. 30 Germany has become the major risktaker of default risks of the crisis countries of the Euro area and now has become the target of blaming it for doing so.

There is a German proverb: Undank ist der Welten Lohn, i.e. no good deed goes unpunished.

Therefore it is unsurprising that Krugman finishes his attack against German politics by stating:

Of course, I dont expect German officials to admit that theres anything to what Treasury says. Theyre not big on macroeconomics as we understand it; actually, theyre not big on accounting identities, since their view seems to be that everyone should be like Germany, and run huge trade surpluses.

But Treasury just stated the obvious and true.

Sorry Paul, I feel I have to object. Please get the facts right first and then make your judgment.

Another critique of the German trade surplus has been recently published by Martin Wolff in the Financial Times.

Martin Wolffs common fallacy on trade surpluses

What is global demand? Is it simply a fixed entity at a certain moment in time or does it depends on the state of the global economy? In the debate on trade surpluses and deficits in global trade it is easy to show that there is a strict complementarity if global output is fixed exogenously that those countries that run a trade surplus opposite those with a deficit are winners and the other losers in trade. Dividing the cake makes it not grow larger. However this is a static view on the issue. Martin Wolff seems to stick to this common fallacy. 31

What if the size of the cake depends on the efficient allocation of global resources? We know from neoclassical growth theory that it might be beneficial if a capital rich country e.g. like Germany exports capital because if invested abroad in countries with a higher marginal productivity of capital it could generate higher returns than at home. So capital exports might be a win win strategy for both countries. If the creditor country lends out capital at a lower rate of return than the debtor country is able to generate by utilizing it, the debtor country would be able to pay the interest on the borrowed capital and still keep a surplus from this operation. So capital exports can under such circumstances be beneficial to both of them. On the contrary the exported capital can be wasted abroad e.g. by buying consumption goods in particular luxury cars like Mercedes or Bentleys since the transfer of revenues has no positive return neither to cover the borrowing cost not even to create an additional surplus. This kind of capital transfer is bad for both countries because the creditor risks that his debtor will default on this kind of borrowing.

What I want to illustrate by these two examples is that from the mere fact that there exists a current account surplus and deficit between countries one cannot simply deduct if it is evil or good.

30 http://www.bis.org/publ/work393.pdf 31 http://www.ft.com/cms/s/0/291a5ca6-42ec-11e3-8350-00144feabdc0.html


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However, many economists like Martin Wolf still stick with the issue that that a current account surplus opposite other countries running a deficit is always harmful. This is a dangerous simplification. The fact is that in some cases it might contribute to grow the cake bigger while in other cases it shrinks the cake. It will be therefore an open question what is the overall net effect. Therefore one should separate those countries with too much consumption financed by external capital imports which would lead sooner or later to a current account crisis harming debtor and creditor countries from the others where the import of capital improves the growth performance. The whole debate why developed countries usually considered being capital rich should export capital to emerging economies or developing countries is based on this kind of reasoning. So like Cinderella one has always to separate the good peas from the rotten ones and one has to look at the impact those capital transfers have. This is tedious but it is the only way to make a proper assessment.

Its the Income Distribution, stupid!

What is not taken as the fundamental cause of the global demand weakness is the steadily widening global income inequality. It's the economy, stupid is a slight variation of the phrase The economy, stupid which James Carville had coined as a campaign strategist of Bill Clinton's successful 1992 presidential campaign against sitting president George H. W. Bush. 32 Was this saying was pointing out is that elections are not won by other topics on the policy agenda if the economy is in trouble.

Similarly one could modify this in the current global situation where there is a lack in global demand. With rich are getting ever richer since quite some time and the poor poorer as regularly all kinds of global wealth reports 33 illustrate again and again. The lack in global demand is due to a distributional problem.

Figure 2 Increasing Income Inequality in the OECDCountries, 2007 to 2010. 34

Source: OECD.

32 http://en.wikipedia.org/wiki/It%27s_the_economy,_stupid 33 http://www.worldwealthreport.com/ 34 Changes in the Ginicoefficient from 2007 to 2010 in percent.


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As one can see Germany is one of the few countries with a decreasing income inequality during the Great global economic crisis. That is the German social market economy opposite the market economy of the market radicals. Therefore consolidation policies in most other countries have had a social bias. Austerity, however, is not caused by less government spending but by transferring the burden of huge government spending on its citizens through higher taxes, reduced social transfer payments and less public infrastructure investments and paying often higher interest rates to those with large portfolios of government bonds, i.e. the commercial banks, hedge funds and other rich private investors. Austerity is not austerity of government major government budget reductions, but instead by substituting government investments and consumption for interest payments and closing the looming public deficit by increasing the revenues from the private sector. 35

The rich spend less on consumption as the poor would do if they could. The rich peoples consumption is not income constrained. Usually they still save most of their income. Simply by interest revenue, profits, wealth effects and tax evasion their income and wealth increase steadily. The poor have often too little disposable income even to cover their basic needs or consume more than their long term disposable income could cover to avoid ending finally in a debt trap and default. 36 As long, however, incomes of the poorer are lagging more and more behind of that of the rich, there will be a cumulative growing global demand gap. The costs of the meltdown of global financial markets where passed over to the ordinary tax payers of main street and left the Wall Street and all the other global financial market agents in particular the wealthy untouched. It is no surprise that this kind of burden sharing led to movements like Occupy Wall Street or even the Tea Party. Large parts of the societies felt that the current consolidation policies are highly unjust, but the origin of this injustice rests on the role of national governments and not on the German trade surplus. The unorthodox monetary policies of major central banks automatically lead to a social bias on their

monetary stabilization policy.37

It is just the mechanism of ultra low interest rates for years plus the buying programs of QEs, SMPs and OMTs which leads to risk transfers from the wealthy towards to central banks which at some point will transfer the implicit losses towards the general public. Meanwhile only those who have access to the low interest loans benefit from this kind of monetary policy. The others face still significantly higher interest rates. Since the money in the hand of the wealthy is not invested in new real investments but due to the demand gap is used to buy assets at the stock market or in real estate, the trickledown effect from the liquidity created by the central banks is extremely low but creates assets price and real estate bubbles. When finally this distorted economic development becomes evidently unsustainable the bubble bursts and the global economy will face an even more severe crisis than in 2008/2009. Instead of making the financial markets less

vulnerable towards a systemic meltdown the current reforms has nothing really contributed to make them less fragile, i.e. anti fragile. 38

Lack of global demand depresses global investment since even if the financing costs are incredibly low nobody will invest in additional production capacities with expecting demand which will take over the additional supply. It is this distorted global income distribution as well as similar at the national level which holds back global growth. At the same time the excess savings are spend on speculative purposes like stocks and real estate to create bubbles. For the rich there is no alternative

35 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2226319 36 http://www.ilo.org/global/research/global-reports/global-wage-report/2012/lang--en/index.htm 37 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2294951 38 Taleb, N. N. (20132), Antifragile: Things That Gain from Disorder , Random House, New York.


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until they realize that they have to give up some of their surpluses to the poor. It is to my mind no surprise that the recent IMF Fiscal Monitor just now addressed this issue. 39

Up to now for at least the past five years governments around the globe have supported effective demand by running huge fiscal deficits. However, this put them into a position that their sustainable

fiscal position opposite the private sector deteriorated.

Looming defaults force the government at some point to switch to an austerity policy if they do not dare to touch the income inequality at its root. This, however, makes things even worse. If the poor even get poorer due to fewer transfer payments from the state and a deteriorating public infrastructure, the social crisis becomes even more pronounced.

One only has to look at the history of past revolutions. It was simply the ignorance to understand that they have overdone the redistribution from the poor to the rich. It is no surprise that the ILO in its recent report warns on an increasing risk of a global escalation of social unrest. 40 Without an

active policy

to

redistribute

wealth

and

income

from

the

rich

to

the

poor

the

situation

would

run

more and more out of hand. Then the only way out are social revolutions and social unrest. Why nobody of the currently ruling elites is able to understand this challenge?

Its a shame that monetary policy with its unorthodox flooding the global economy with liquidity did not see the fact, that it is only putting oil into the flames. The money ends up not there where it is needed, i.e. the poor, but in the pockets of the rich. This just accelerates the disintegration of the social fabric.

Conclusion

The current debate triggered from the US that Germany is the key villain in global structural imbalances is based on false interpretation of the statistics used to found their arguments. A first step to disentangle the problems and misunderstandings of the arguments presented in the debate by the critics of the German internal trading position already gives some significant corrections which shows that the situation is much less dramatic than what the critics of Germany conclude.

Socrates as a skeptic on the possibility of perfect knowledge always claimed: scio me nihil scire or scio me nescire. 41 I am not claiming here that I have uncovered the perfect truth about the situation how much Germany is contributing to the global structural imbalances in trade, but I think I have found clear evidence that the arguments proposed by the critics of Germany base their

arguments on wrong data and false interpretations of them.

Much is based on prejudices that Germany because of his historical record as a trading nation and current relative positive position in the global economy must have used unfair trading practices. In Latin this logic fallacy is named: cum post hoc ergo propter hoc 42 .

May another Latin saying would be more appropriate: Rerum cognoscere causas 43. We should be more modest in our conclusions because we dont know if we have understood the origin of a problem properly.

39

http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf 40 http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_214476.pdf 41 I know that I know nothing 42 Correlation does not imply causation.


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19 43 Quote from Vergil: happy is he who can discover the causes of things.