Why Germany Can Be For Europe What China is for The

United States of AmericaA THEORETICAL APPROACH

A presentation by Knut Linke, University of Latvia, at the International Conference:

CURRENT ISSUES IN BUSINESS & SOCIETY05-07 MAY, 2011

RIGA, LATVIA

Overview

Current situation Current issues Financial situation Future development Possible solutions

• Financial crisis since 2007 (up to 2011)• Still existing i.e. in the US, Europe and other states [1]

• US goverment just release the unenployment rate for April with a increase of 224.000 new unemployments (9% rate)

• Some states have allready recoverd from the crisis

• Some states have not recovered already from the crisis [2]

• The US had the need to increase their debt to provide internal stability to the country [3]

Current situation

• European Union needs to support several states in the union with credits [4], [5]• European Financial Stability Facility (EFSF)• Bad Banks

• Available money for states in crisis had to be increased several time during the last month [6]

Current issue

• China supports the US by purchasing T-bonds and supports with this the debt situation for the US [6]• Debt ration from the US reached allready 95% [7]• US gets in the direction to loose his AAA rating [8]

• Germany (mainly) and other EU states supports other countries in the EU which are in financial problems (Greece, Portugal, Spain) [9], [10]

Financial situation

Consumer credits

Germany GDP (positive)

China GDP (positive)

• Exchange rate in the union is fix based on the Euro• It is not possible to include different efficency and productivity

in the union anymore

• Exchange rate between China and US depends on a special drawing right (SDR) [11]• Fixend exchange rate between the US and China• No possibility to decrease the cost for US goods to China or to

increase prices for goods from China, if the goverment in China does not agree [12]

Financial situation

US GDP (negative)

Spain GDP (currently positive)

• China provides mainly the goods for the consumption behavior in the states [13]• China has a positive trade balance [14]• Refinancing by supporting consumption in the US [15]

• Increasing of the available primary market in the EU [16]• German goods are mainly requested and consumed in the

European union [16]• Germany has a positive trade balance [17]• Refinancing by supporting consumption in EU and by get in debts

to a lower percentage as the credits are given to other countries [16], [18]

Refinancing of the debts

• Refinancing for Germany will be get harder on the market • Germany will be still mainly the engine in Europe for growth over

the next years [19].

• China is re-thinking his financial support for the US [20]:• „Let me be more positive: if I had an agreement with my

tailor that whatever money I pay him returns to me the very same day as a loan, I would have no objection at all

to ordering more suits from him.”• Adjustment of the international monetary system of

floating currencies and open markets [21].

Future development

• Re-thinking global consumption behaviour • Re-think if China and Germany can always focus on a positive

trade balance

• Think global, act local• A new Bretton Wood approach with a global currency to avoid

exchange issues [30], [31]• Davos 2011

• Re-think pure profit orientation

Possible solution

[1] Tomasz Konicz: Der erste große Klimaaufstand, http://www.heise.de/tp/r4/artikel/34/34174/1.html, 02/11/2011.

[2] Reuters: Neuer Absurtz – Griechische Wirtschaft schrumpft dramatisch, http://www.spiegel.de/wirtschaft/soziales/0,1518,711533,00.html, 02/12/2011.

[3] Klaus Först: Staatsverschuldung Ausland: USA, 03/14/2011, http://www.staatsverschuldung.de/usa01.htm, 03/20/2011.

[4] EFSF: An introduction to the European Financial Stability Facility, November 2010, http://www.efsf.europa.eu/attachment/efsf-presentation-november-2010.pdf, 03/30/2011.

[5] James K. Jackson: The Financial Crisis - Impact on the Response by the European Union, Congressional Research Service. 2009. P. 36.

[6] Frankfurter Allgemeine Zeitung: Barroso will größeren Euro-Rettungsschirm - Merkel gegen Erweiterung, 01/12/2011, http://www.faz.net/s/Rub3ADB8A210E754E748F42960CC7349BDF/Doc~E42830655163747CB814886EA51E33F18~ATpl~Ecommon~Scontent.html, 02/20/2011.

[6] China Daily: China reduziert seinen Besitz an US-amerikanischen Staatsschulden, 02/10/2010, http://german.china.org.cn/fokus/2010-02/20/content_19442349.htm, 02/15/2011.

[7] Klaus Först: Staatsverschuldung Ausland: USA, 03/14/2011, http://www.staatsverschuldung.de/usa01.htm, 03/20/2011.

[8] Matthew Brown: U.S., U.K. Move Closer to Losing Rating, Moody’s Says, 03/15/2011, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8c_1vtVGzD8, 03/20/2011.

[9] Peter Schelling: Im angeschlagenen Spanien schwindet die Hoffnung, 07/12/2010, http://www.welt.de/wirtschaft/article8422194/Im-angeschlagenen-Spanien-schwindet-die-Hoffnung.html, 02/12/2011.

References-1

[10] Frankfurter Allgemeine Zeitung: Barroso will größeren Euro-Rettungsschirm - Merkel gegen Erweiterung, 01/12/2011, http://www.faz.net/s/Rub3ADB8A210E754E748F42960CC7349BDF/Doc~E42830655163747CB814886EA51E33F18~ATpl~Ecommon~Scontent.html, 02/20/2011.

[11] Werner Antweiler. Special Drawing Rights. University of British Columbia, 2011, http://fx.sauder.ubc.ca/SDR.html, 01/27/2011.

[12] Reuters: Währungsstreit – China wertet Yuan minimal auf, 10/13/2010, http://www.spiegel.de/wirtschaft/soziales/0,1518,722804,00.html, 03/20/2011.

[13] Frankfurter Allgemeine Zeitung: Dollar Staatsanleihen - China ist entsetzt über Amerikas Geldpolitik, 11/05/2010, http://www.faz.net/s/Rub0E9EEF84AC1E4A389A8DC6C23161FE44/Doc~E7574FA1CEC7D4B13943B51EDEDB777B9~ATpl~Ecommon~Scontent.html, 03/20/2011.

[14] Deutsche Presse Agentur: China macht Schulden wie nie, 03/05/2011, http://www.n-tv.de/politik/China-macht-Schulden-wie-nie-article761065.html, 03/21/2011.

[15] Christian Hoyer: USA in China starker verschuldet als erwartet, Börse Go, 03/01/2011, http://www.boerse-go.de/nachricht/USA-in-China-staerker-verschuldet-als-erwartet-DOW-Jones-Industrial-Average-Index,a2478251.html, 03/20/2011.

[16] Riva Froymovich, Patrick McGroarty, Nathalie Boschat, Costas Paris: Euro-Pakt steht, EFSF/ESM dürfen Anleihen am Primärmarkt kaufen, Dow Jones Deutschland, http://www.dowjones.de/site/2011/03/euro-pakt-steht-efsesm-dürfen-anleien-am-primärmarkt-kaufen.html, 03/20/2011.

[17] Central Intelligence Agency: Public Debt, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html, 03/21/2011.

References-2

[18] Klaus Förster: Der Gläubiger: Wer leiht dem Staat so viel Geld?, Staatsverschuldung.de, http://www.staatsverschuldung.de/glaeubiger.htm, 03/21/2011.

[19] Michael Schuman: How Germany became the China of Europe, Time, http://www.time.com/time/printout/0,8816,2053595,00.html, Stuttgart, 07/03/2011.

[20] Michael P. Dooley, David Folkerts-Landau and Peter Garber: The revived Bretton Woods System, INTERNATIONAL JOURNAL OF FINANCE AND ECONOMICS, 9: 307–313, 2004, National Bureau of Economic Research, USA http://web.ku.edu/~intecon/Read/Dooley04.pdf, 03/31/2011.

[21] Michael Dooley, David Folkerts-Landau, Peter Garber, International Financial Stability – Asia, Interest Rates, and the Dollar, Deutsche Bank Global Marketes Research, 2005. P. 140.

[22] Jörg Bibow: Global Imbalances, Bretton Woods II, and Euroland’s Role in All This, The Levy Economics Institute of Brad College, Working Paper No. 486, December 2006, *Skidmore College, Saratoga Springs, NY. This paper was presented at the conference “Euroland: Global Player or Global Drag?” in Lugano, Switzerland, on March 3, 2006.

[23] Benjamin Cohen: Bretton Woods System, prepared for the Routledge Encyclopedia of International Political Economy, http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html, 27.01.2011

References-3

THANK YOU FOR YOUR ATTENTION