9
Mar

Should Germany policy on exporting change?

Escrito el 9 marzo 2013 por Mikel Aguirre en Economía Global

Today German economy relies more on exporting to the rest of the world and less on the homegrown demand

Southern countries such as Italy or Spain are struggling to increase exports, obtaining a surplus that allows them to cancel debts. Every decrease in the trade deficits of those countries has to be matched by a decrease in someone else’s trade surplus.  And it doesn’t look like Germany is getting it as their current account balance had a 5.7 surplus in 2011 and it is expected to end around 5.8 in 2013.  The country it is not affected by a continuous rise of the currency.  In fact if the country still had its own currency, it will be soaring, diminishing exports.blog-12-containerschiff-small

Adam Posen of Washington’s Peterson Institute for International Economics affirms that “Germany sees export success as a goal in itself rather than a means to an end”.

The fact is that this economic policy , threatens the viability of the recovery in the South of Europe, hence Spain or Portugal will not be able to pay back the loans that Germany’s savers, banks and institutions have made to them

Shouldn’t Germany increase its focus in the local economy, increase government spending and less in increasing its trade surplus? German households will again benefit in 2013 from a higher disposable income, due to wage rises and a rather accommodative fiscal policy.  It is unlikely they will turn to American-style consumers but this spending power should be spent in the local economy

Comentarios

Carina Sauter 10 marzo 2013 - 18:08

The demand for Germany to decrease its exports in order to allow the other European countries to recover from the crisis more quickly is nothing new in the European political scene. In 2010, French minister Christine Lagarde already criticized Germany for its export politics and demanded a decrease in taxes to increase German consumption, which would be beneficial for the European Union and – as one of the German top trading partners – France.
Apart from the question whether there is true causality between a strong German trading surplus and the crisis in the Southern European countries, it should not be forgotten that countries themselves do not export – firms do. Also, not every firm exports, only the most productive and competitive ones do. It is un undeniable fact that Germany has a strong “Mittelstand” that provides companies both in Germany and abroad with innovative, highly-demanded products not obtainable in the same quality and price elsewhere. This trade surplus is therefore evidence of Germany exporting knowledge and know-how to firms in other countries. This knowledge diffusion supports increases in productivity abroad and in the long-term will actually lead to a decreasing German competitive advantage.
Most German exports are advanced technologies that will be assimilated in their countries of destination and lead to quicker technological advances there, too, setting the ground for increased competitiveness in the future.

On a different note, while this is clearly a problematic situation, making Germany produce less attractive products that will not be bought abroad, telling companies where they can sell their products and therefore slowing down the German economy for the sake of the slower growing economies in Europe’s south is not really a suggestion that Germany can take seriously. Historically, Germany has focused on innovation, R&D and scientific advancement, initiatives that are paying off now. If other countries cannot compete, then this should be a clear signal not for Germany to wait for the others to catch up but rather for the other countries to improve their competitiveness. Germany went through this phase as the “sick man of Europe” in the 90s and only harsh changes like the Hartz reforms got the economy running again. Therefore, those kind of reforms should be aimed at in the suffering countries, making others perform worse should not.

Joséphine Kant 10 marzo 2013 - 20:39

Firstly, if German consumers spend more money in the local economy rather than importing goods and services from the rest of the Eurozone, then the trade surplus of Germany will increase. This is because as we know the trade surplus is given by exports-imports and if you decrease imports because you want to spend more of your money domestically, the trade surplus will go up. Thus in order to decrease the trade deficit of the peripheral Eurozone economies such as Spain and Portugal, the Germans need to import more and spend less money in the local economy. This is if we assume that the total trade balance of the Eurozone will trend around zero (think about the zero-sum game theory).

However, we know that the trade balance of a country is an inverted function of their real exchange rate. When a country have a real exchange rate over 1 (a weighted average of its own currency’s strength against its trade partners) it has a trade deficit. This is because you can buy more or better products for the same amount of money abroad than at home. Thus foreigners will not buy from that country (exports goes down) and people living in that country will try to buy more abroad (imports will go up).

The core problem especially in Spain is that their real exchange rate has been higher than 1 since they entered into the Eurozone. This has led Spain to build the second highest trade deficit in the world, only surpassed by the US. The reason behind this has been higher increase in prices than in their trading partners while maintaining the same nominal exchange rate (Euro).

Normally a country has two ways to counter a trade deficit. The first and fastest tool is revaluation of their currency. The second and much slower tool is decreasing in inflation relative to their trade partners. As we know Spain cannot reevaluate their currency against 80% of their trade partners (they have the same currency). That leaves relative reduction of inflation. When we know that Germany have one of the strongest focuses on price stability in the world, this option will be a long and painful way of coming back to trade surplus for Spain. Also taking into account the fact that Spain historically have shown to be an economy with very sticky prices, this option seems unrealistic in short to medium term.

With this analysis I would say that the only way for Spain to return to a trade surplus is by leaving the Eurozone, or that the Eurozone as a whole start producing a massive trade surplus (not very realistic). Then again we could argue that a trade surplus itself is not a goal, because by definition you need to produce or work more than you consume. But on the other hand lengthy accumulation of trade deficits means accumulation of public debt, which will need to be paid back at one point.

According to economic theory, a trade deficit can also be caused by a massive inflow of capital by foreigners through FDI and portfolio acquisition. This is the case in the USA where they have had a trade deficit for over 35 years now. Here the dollar is kept strong by central banks buying reserves and by institutional and private investors buying securities. Thus this means the trade balance will be negative, because by definition trade balance + capital balance have to equal zero (as seen through our lecture on Balance of Payment). However, I don’t think this is the case in Spain. The Spanish economy is not characterized by a soaring portfolio of FDI flow, especially in today’s context.

As we discussed vigorously in class, if Germany were to give (read: lend) money to Spain, this would not come without certain conditions. And these are conditions that are unlikely to be fulfilled by the troubled economy. Therefore, I believe that the changes in order to recover the Spanish economy does not have to come from Germany. It has to come from Spain.

Ruth Talbot 12 marzo 2013 - 21:35

Asking Germany to decrease its exports and focus on increasing its nations domestic spending seems to me like an unrealistic solution. For many of the reasons already stated above, also because it seems like a very unfair solution. Asking Germany to give up their main competitive advantage that helped them survive the 2008 economic crisis and continue to grow their economy. Germany knows all to well what it is like to suffer a great recession, as they did in the years following the Second World War. The nation has come a long way since then and have been able to build a strong prosperous economy. As a part of the EU I believe Germany should help Spain and Italy to help overcome their current economic crisis’s, however I do not believe this includes changing the structure of their economy. Since they have worked very hard to gain their position. Also, as mentioned above, they are dominating the R&D and technology market, which neither Spain or Italy have a very big market share in.

Given Spain and Italy’s current position an export led recovery may not be plausible. Over the past few years both of their net exports have been decreasing. This is only forecasted to continue as emerging markets begin to increase their presence in the market, causing European countries, in general to begin to lose their dominance in the market. This is another reason why Germany should not change its current export strategy, as nations such as those included in the BRICs continue to develop, becoming further competition in the global market.

In order for Spain and Italy to get out of their current economic crises, one possible solution is for them to undertake some domestic reforms and change their trade policies in order to make themselves more attractive platforms for foreign investors. This could be done in several ways: by increasing competition between suppliers, encouraging lower wages and shifting the tax burden onto composition and away from payroll. They can, also, create export credit and promotion, encourage inward foreign investment and reduce ‘red tape’ policies.

Miguel Aguirre 14 marzo 2013 - 08:25

I have to agree with Ruth on this matter. As she already mentioned, Germany’s exports are their main competitive advantage, and it doesn’t seem fair to me that they should give this up in order to honour the economy’s of Southern European countries such as Italy, Spain and Portugal. Another important factor to consider, as mentioned by Ruth is that Germany has invested greatly in R&D and technology which Italy and Spain do not boast. Due to the speed and importance of R&D and technology in today’s world, it is natural for Germany to have a competitive advantage in this sense. I agree with Carina on the point that Germany cannot possibly take the suggestion of slowing down their exports, as this would jeopardise their future success and prospects. I believe that Southern European countries should focus on improving their own economies through export or reforms in order to set them back on track
Chiara Massironi

Virginia Bencivenga 14 marzo 2013 - 12:25

As stated above, i believe that it is unfair to request that Germany should focus on increasing other nation’s spending, due to the fact that they are preforming better. During the 30’s Germany had to go over a though recession crisis, therefore it seems more than fair they have gained their main competitive advantage learning from past mistakes. R&D and technology are the strength of Germany, they have managed to tackle the main factors that will help them during this recession. Looking at countries such as Spain and Italy there seem to be a high pattern of spending however not enough money actually being injected into the countries. Therefore, restating my point, i do not think it is Germany’s job to get them out of this crisis. But rather they should learn from Germany and try and improve their consumption. Spain, Italy, Greece all the countries that are being badly affected from this crisis should try and improve their status by gaining the attention of foreign investors perhaps by changing their taxation policy or by changing their trade policies

Yunqi Wu 14 marzo 2013 - 20:03

I cannot agree more with the reasons stated above to support the point of view that it is not Germany’s duty to help the peripheral countries out of their bad national economic situations by reducing its own export. Even if Germany were to decrease its export, it’s still not going to do much good to Spain as it is the second biggest country that Spain imports from. The governments in countries like Spain should take immediate measures to improve their trade deficit, for example, establishing bilateral trade agreements with the BRICS or developing countries for higher exportation as those are the ones that have money to buy now.
These European countries tend to argue more for their own benefits and prosperity than thinking of the future of Europe as a whole, which partly caused the debate among them. This is understandable but also indicates to some extent that the European Union is no longer a sustainable model.

Koteki Inaba 15 marzo 2013 - 02:12

As my classmates have mentioned previously, I believe asking Germany to decrease its exports and focus on increasing its nations domestic spending is not a viable solution for anyone. However, the point I’d like to shed light on was made by Isabel- the aspect of Germany’s current role in the EU and whether or not the EU is a sustainable model through this debate. The EU operates certain competition policies ensuring “undistorted competition within the single market.” As Germany increased its exports, it left southern countries with unaffordable external deficits in the past by exporting exponentially more (for example to Spain) than what they would import in return. Is it really Germany’s “responsibility” to ensure that Spain, Greece and Italy can export more to them in order to grow their way out of trouble? These imbalances in the EU contribute to Southern European countries facing a long period of deflation, and although I agree with many of the suggested reforms, and changes among trade policies mentioned above, restoring competitiveness against their northern competitors will be a very slow process. Structural reforms require several years of deflation, and can be extremely costly in terms of lost GDP and high unemployment.

Germany’s Economy minister Philipp Roesler stated yesterday “[Germany’s] success with a policy of growth-oriented consolidation is the envy of the world.” Yes, there is much the many struggling countries of the EU can learn from Germany, however I do believe there still needs to be a more positive rebalancing of European demand in order to help Southern European countries. How Germany will balance its own economic growth vs. its “responsibility” as the leading European economy by making contributions to debt-ridden countries remains a difficult issue that is sure to be unsettled anytime soon.

LUZ DELGADO 20 marzo 2013 - 18:58

In any country, the issue of deficits and surpluses in the trade balance has a considerable influence on the overall level of employment and inflationary and deflationary trends in the domestic economy. Germany has a GDP that depends on more than 40% in its exports; its level of exports has been part of their economic development strategy. German industrial production capacity significantly exceeds its domestic market. Consequently, maintaining its exports enabled Germany to maintain a competitive advantage through the crisis, unlike other European countries. Germany has an economy with unemployed resources, in which positive net exports (trade surplus) can contribute to the real expansion of employment, production and income. Request to change that just because other countries do not have good fiscal and trade is absurd. To ensure that other European countries have the ability to pay their debts, governments must reduce public spending and change their tax policies. Finally, the decision is not dependent on Germany only, but each country should discuss and decide the policies regarding the valuation and devaluation of their currency, which has an immediate effect on each country’s trade balance.

Rafael Rios 1 abril 2013 - 10:39

I believe that even though of Germany would shift from trading to more local spending, thus giving more opportunity to the southern countries to trade, this would not make a significant change in the southern economies, as their problem is not that much with trade, but with structural issues. In order for this change, if it where to happen, to be effective, firstly there should be more structural changes.
Still I do not think Germany should just decrease its trading in order to help out southern countries, as it would not make any type of sense, due to Germany’s economical tradition.

annie cheung ka wing 2 abril 2013 - 16:37

I totally agree that it is unfair for Germany to give up it’s export industry so as to save southern european countries. Although they all belongs to EU but Germany has no responsibilities and duty to do that. It just like within the same class, Student A achieved good academic result but not Student B and C. Teacher will not ask Student A to work less and not study in order to lower the mean and help Student B and C. Germany’s success is because it invest large amount in research and development and had well-sounded structures and policies. The only way for southern european countries to recover is to reform it’s structure in terms of social welfare and trade policies etc. It will absolutely take time but i believe it tackle the problem at the root as well as surface.

Julien GONCALVES 3 abril 2013 - 19:35

I think nearly everything has been said on the topic and I agree with most of the posts above, particularly with the one from Rafael. The fact that Germany exports a lot is not responsible for the difficult economical situation that Spain or Portugal for example are facing.
Indeed, Germany should rather be seen as an example in terms of economical development. These countries should take the German system as an example and invest a lot in Research & Development, For instance, knowing that these countries enjoy from more sunshine that most of other european countries, they could focus on renewable energies that will most probably play an important role in tomorrow’s world.

Erin Kirley 5 abril 2013 - 16:54

I agree with my classmates and I like Annie’s comparison to a student’s academic results. After the struggles Germany went through in the 90’s with high unemployment, low morale and uncompetitive wages, it seems absurd to ask them to perform worse in order to improve the state of the southern European countries. I can see why the Germans don’t take this suggestion seriously. They had to deal with similar disadvantages and with a lot of hard work they were able to recover. Instead of blaming inefficiencies on Germany, the southern European countries that have been affected by this crisis should focus on different, more productive ways that can revive their economy. Furthermore, asking the second largest exporter in the world to export less will end up hurting other economies that depend on German exports. Instead, Germany should be looked at as an example to recover from the economic crisis not as an easy solution.

Josephine Kant 8 abril 2013 - 10:42

Bernd Lucke, founder of Germany’s first “eurosceptic” party recently gave a very interesting interview yesterday on Germany’s role in the EU to the Telegraph. I am attaching the link below if anyone would like to read it:

http://www.telegraph.co.uk/news/worldnews/europe/germany/9975766/Bernd-Lucke-interview-Why-Germany-has-had-enough-of-the-euro.html

He basically proposes that Germany is being dragged down by other countries within the EU (especially Southern European ones such as Spain and Portugal) and should no longer serve as a piggy bank for these countries. It has already given €7.5bn to the EU according to 2011 statistics, and said countries have not been shy to ask for the money, and furthermore under favourable lending conditions.

What I find very interesting to note here is that Spain is a country that has continuously asked to borrow money from the EU and its several bodies aimed at helping countries restructure their financial institutions, yet it has never been able to formally ask for a bail-out. I wonder if this is something to do with the political and cultural consistency (that is to say, Spain has always been considered a proud country and it values its independence), or if they do not think they would be able to comply with the terms of the potential bail out. As I mentioned before and as we discussed in class, lending money never comes without strings attached.

Going back to the article, I would like to quote one of the most interesting parts:

“The euro is not a currency under which the European project can prosper,” he said. “There is a division of Europe now and this is going to become bigger in the future, if we don’t stop this process and introduce more monetary flexibility for those countries who suffer the most.”

Lucke firmly believes that Europe is already divided, that the European Union is no longer a real union, and that if monetary flexibility (I think by this he means, for example, Spain going back to their pesos – which would be highly devalued!) were introduced then countries would be better off. What he forgot to specify is that GERMANY would be better off. However, I would argue here the European Union treaty was not signed with a clause stating that if a country felt it was performing “better” than its fellow states, then it would have the sovereignty to simply leave without further repercussions. Germany did have the autonomy to express its discontent against Eurobonds, but starting a eurosceptic party with the aim of convincing the German population that Germany should leave the EU is a much more dramatic approach…

Lucke supports his argument by arguing that the work ethic in the North is vastly different from that in the South. Albeit practically true, this is a generalisation that I believe cannot serve as a basis on which Germany can revoke its EU membership. Not even France should be allowed to be in the EU, according to the sceptic. The most worrying part of all perhaps is that “26 per cent of Germans would consider voting for an anti-euro party”. It will be really interesting to see how this plays out… as we mentioned in the last class there are no economic relations without a political influence. I look forward to hearing your comments.

Benjamin Syang 11 abril 2013 - 14:32

In reference to the article that Josephine posted: Ironically, a German exit could stand to be quite beneficial to the southern countries/would negatively impact German exports. First, as we discussed in class during the Germany discussion a few classes back, Southern European debts to Germany are to be repaid in Euros. A German exit would result in a tremendous devaluation of the “new” Euro without Germany. But of course, Bernd Lucke proposes a different strategy, with the Southern European countries exiting first. First of all, the exits of Southern European countries could lead to Global financial chaos (http://www.bloomberg.com/news/2012-06-10/forget-greece-a-german-euro-exit-might-be-better.html) In this case, it would harm Germany because a stronger Euro and the very weak newly created southern currencies would mean a significant increase in the price of German exports. The price of Southern European exports would conversely also be cheaper, thus aiding their trade imbalance.
I feel that most of the above comments have all sufficiently argued that the German Policy on Exporting should not change to aid the Southern European countries. It’s hard to argue against this view. But I think the first sentence of Josephine’s first post says it all: “if German consumers spend more money in the local economy rather than importing goods and services from the rest of the Eurozone, then the trade surplus of Germany will increase.” Likewise, as many of the other posts have said, the onus of Spain’s or Portugal’s or Italy’s woes falls on the countries themselves. Perhaps getting rid of the siesta in Spain would boost productivity…

Josephine Kant 12 abril 2013 - 10:05

Firstly, I agree with the last comment regarding the danger of Germany leaving the Eurozone because of their severe potential reduction of debt Collection. Some might even go as far as to suggest that as being one of the key pillars keeping Germany inside the Euro…

However, in response to Benjamin’s last comment on getting rid of the siesta – I would like to recommend you all to have a look at this article.

http://www.bbc.co.uk/news/magazine-17155304

I remember reading this last year and being shocked that Greece and Southern European countries actually put in the LONGEST working hours yet have the LOWEST productivity. Quoting the article, “the average Greek is working a full 40% longer than the average German.” By the way, it is quite interesting to see that Germany is the 2nd lowest on that table. So what does this mean and how can we put it in context?

Well, first of all, as the article suggests, most of this difference can be explained due to structural differences in the labour market composition. However, looking at GDP, we can see very clearly that Germany is (obviously) a lot more productive than Greece. Perhaps this highlights why all the countries that work the least hours also apppear to be the most productive. I wonder how the Spanish feel about this situation and what kind of social constructions would have to be put into place to change this…

Efficiency plays a key role in the Eurozone, and as we can see from this anecdote definitions tend to vary hugely… How is it that we can have a common economic and monetary policy, share the same currency, enjoy the same trade agreements, yet we have no political bindings whatsoever? The actual influence of the European Parliament is, in my opinion, rather limited in shaping political ideologies on a joint level.

I’d like to leave you with something to think about. As the Members of the European Parliament (MEPs) are represented according to population size… if Turkey were to be accepted into the EU then it would have the 2nd largest amount of political influence right after Germany. No wonder that Germany is so strongly opposed to its membership into the EU, and no wonder that Germany is so unhappy with the lack of productivity in some of the European member states…

Nicoleta Chiriac 14 abril 2013 - 15:24

I highly agree wtih Bejamin’s above comment that the southern European counties woes fall on the countries themselves. As everyone has mentioned above it would not be fair to ask Germany to decrease their exports and focus on spending more in their own economy just so that other European countries would be able to decrease their debts. However, this is quite a vicious cycle. Spain, Italy, Portugal, and Greece need to decrease their debts and pay off Germany. If they were to exit the EU their currencies would be highly weakened and it would make it even more difficult for these countries to pay off their debt to Germany.
I understand Germany’s position in wanting to continue to increase their trade surplus. Since the economic crisis Germany has been recovering better than any of the other EU countries. Clearly they are doing something right. However, their position is only taken to consider what is happening in Germany, not other EU countries. In order for the EU to progress as a whole, economic policies should be devised that consider all countries equally. Today it seems like Germany is the one main leader of the EU and until this position changes I don’t see the EU recovering from this economic crisis very soon.

David Stranghoener 14 abril 2013 - 22:45

I think it is the clear opinion here that Germany purposefully taking actions to reduce its exports for the sake of other Eurozone countries would be foolish and is simply not going to happen. No country is going to deliberately sabotage their competitive advantage. Devaluing the Euro for the sake of southern Europe’s exports wouldn’t even be a long-term solution to those countries’ balance of payments issue. It is true that the increased exports would help them pay off some of their debt owed to Germany, but if they aren’t strengthening their export sectors and are instead relying only on a cheaper currency to sell their goods, the southern countries will again run into economic competitiveness issues down the road. Also, the long-term effects of reduced German exports would be a problem for all of the Eurozone if it were to have a large negative impact on the overall German economy. Since we all seem to agree on these points, my question for everyone is what should Germany do about this issue? Clearly Germany has a lot at stake if the South of Europe isn’t able to increase its exports, but what action makes the most sense for the country? Leaving the Eurozone could be one option, but this would decrease the real value of Germany’s Euro-denominated investments and possibly lead to lower German exports due to the increased value of its new currency. Another option may be to forgive some of southern Europe’s debt, in hopes that this would allow the countries to focus and fixing the fundamentals of their economies without a high debt burden to worry about. What other actions could Germany take?

Brett Mennella 15 abril 2013 - 15:08

Germany should focus on its domestic economy by increasing government spending and focusing less on the trade surplus for the benefit of countries with more difficulty exporting products. They currently have the strongest economy in the European Union and would not suffer dramatically by decreasing their trade surplus. Although they may not desire to do so given their trade policy, it would be of tremendous benefit to suffering nations of the European Union. By devaluing the Euro through lower German exports, Spain, Italy, Portugal, and others could increase their exports and trade balance. However, this is somewhat theoretical. Firms can only export if they have products that have international value, a comparative advantage, not simply because it would benefit them as a country to export. These are products that a country has the ability to produce at a lower marginal and opportunity cost over another. Germany might inherently have more advantageous products or services compared to countries like Spain and Italy due to their resources and human capital. That being said, the European Union is in a very fragile state and needs change – whatever that might be and wherever it might come from – if it hopes to survive and thrive in the future. It will be interesting to see if Germany and struggling European countries can find some common ground where Germany does not have to dramatically change its trade policy, yet struggling countries can improve their trade balance.

Baihly Underhill 18 abril 2013 - 16:23

I agree with Chiara’s assessment about the investment Germany has made in R&D being the main source of its competitive advantage in exporting to other European countries. I believe that the immense amount of exporting they do not only benefits their economy, but also benefits the economies of those importing their goods by means of absorbing the technology they acquire into their own economies as a means of improving them without taking the step to invest in R&D themselves. As we have previously mentioned, the purpose of trading is to leave both parties better off after the exchange, and clearly Germany’s large amount of exports benefits the economies of Spain, Portugal, etc. On another note, I would like to agree with Brett’s comment regarding ways for Germany to increase its domestic economic performance. Increasing the trade surplus may seem like a good idea, but by not importing goods from those countries that already have difficulty with exporting goods and services, the German people are neither receiving the benefit of those products and the exporting firms of the aforementioned struggling economies are also suffering as well due to dropping revenues. What the government should focus on is their own spending as a means of bolstering the economy. Through these means, they are able to assist not only themselves, but also those countries who need to reap the benefits that their economic strength yields them.

Caroline Ramos 21 abril 2013 - 22:52

I agree pretty much with everything that has being said here. Germany has already suffered a lot due to the recession after the Second War and they had to work hard to get in the position they are now.
In order to grow, a country has to invest in research and development. Following Annie’s idea, it could be compared to do a homework. If a student does the homework, probably he will obtain better results in the exams, which is fair, since he has worked more to achieve these results. The same happens with Germans. They have done their homework, being the one of European countries that more invested in R&D and now they are picking the good results of it. It is not fair just to ask them to decrease their surplus in order to give a chance to other countries that have not invested as much as they had.

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