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Germany in Eurozone benefits from consistent surpluses greater than China in proportion to GDP
By Michael Hennigan, Founder and Editor of Finfacts
Mar 11, 2011 - 8:43 AM
Germany is in a position to secure for its economy consistent
greater even than those of China in proportion to GDP (gross domestic product),
without the limitations of a compensatory mechanism working through currency
appreciation, according to Domenico Lombardi, an economist at the Washington DC
think-tank, the Brookings Institution.
in a blog post on Thursday, said thanks to the imbalance, Germany has
amplified the benefits for its economy following the introduction of the common
currency. Never has this asymmetry been clearer than at the height of the euro
crisis witnessed last year.
The German economy benefitted from a hidden export subsidy as a result of a
Lombardi said as a result, the current fiscal consolidation in Europe will
produce asymmetric effects. Germany is already compensating for the sustained
decline in demand from its traditional commercial partners in the peripheral
Eurozone by increasing its presence in emerging economies outside of Europe,
while benefiting from the lack of a compensatory mechanism working through
On the other hand, the economist says it is difficult for peripheral countries
of the Eurozone to compensate for the reduction in internal demand with an
increase in external demand: the capacity of these economies to penetrate
emerging markets is much more limited. Their exports tend to be more similar in
terms of technological content, which is relatively low, and the euro exchange
rate, which is more onerous for these countries thanks to the Northern economies
of the monetary union, represents an additional hardship. In this scenario, the
refusal of the German economy to act as driver for the economic recovery of a
crisis-struck Europe is especially problematic.
Looking forward, Lombardi says the Eurozone as a whole, including its
"peripheral" economies, should ask: “what role will it play for itself
and for the global economy in the years to come?” Will the Eurozone be a
deflationary force or a supporting driver for global economic growth? He says
this is a not-too-veiled concern that was presumably discussed by U.S. Treasury
Secretary Timothy Geithner during his visit to Berlin earlier this week.
Trade Imbalances – Causes, Consequences and Policy Measures: Ifo’s Statement for
the Camdessus Commission (pdf), published by the German Ifo institute for
economic research at the University of Munich, with its president Prof. Hans
Werner-Sinn among its authors, says
the low rate of income growth in the early years of the last decade, dampened German imports, while
stimulated German exports, both translating into a huge current account surplus.
Thus, Germany’s current account surplus resulted from the
country’s weakness rather than being a sign of particular strength, as has
sometimes been argued.
In the past few years, Germany was the world’s second-largest
capital exporter after China. From 2002
to 2010, Germany had exported two thirds of its aggregate savings, some €1.05trn
Only one-third was invested at home in factories, equipment,
construction, roads, public buildings and the like. In recent years German
net capital exports peaked just below €200bn annually.
intra-European capital flows could have been mitigated,
had German banks shown more prudent investment
behaviour. After all, four-fifths of German net
capital exports were in the form of financial capital
flows rather than direct investment. However, for various
reasons, these banks shut their eyes to the potential
sovereign state risk. One of these reasons was that
they expected their clients to be bailed out by the
community of states should a particular European
state run into trouble. Another was a deficiency in the
Basel system, under which banks did not have to
impose any risk weights on government bonds and
thus did not need equity against holding such bonds.
In fact, the Basel system had virtually imposed no
constraints on banks lending to governments. This
was a major reason why capital flows had been so
excessive in Europe in recent years and why the
European sovereign debt crisis eventually had to
This week, we reported that the Irish debt to GDP ratio will
rise to 113.5% in 2013 and much higher if the denominator is GNP.
Richest EU countries have the highest taxes; Irish tax burden will be as high as
Denmark's by 2014
Irish National Debt: Public spending was 57.3% of GNP in 2009; Deficits in
2008-2013 will amount to €95bn
Ireland: GDP or GNP? Which is the better measure of economic performance?
On Thursday in Washington DC, Prof. Carmen M. Reinhart, of the Peterson
Institute for International Economics, gave
testimony to a House panel on the US debt crisis.
The economist is the co-author of the celebrated book on eight
centuries of financial crises,
This Time is Different.
Prof. Reinhart said that in a paper written over a year
ago with her c-oauthor Ken Rogoff from Harvard University, they examined the
contemporaneous connection between debt and growth. She summarized some of the
main findings of that paper and as well as recent related work and relevant
studies from the International Monetary Fund (IMF) and European Central Bank
"Our analysis was based on newly-compiled data on 44 countries spanning about
200 years. This amounts to 3,700 annual observations and covers a wide range of
political systems, institutions, exchange rate arrangements, and historic
circumstances. The annual observations were grouped into four categories,
according to the ratio of gross central government debt to GDP during that
particular year: years when debt-to-GDP levels were below 30%; 30 to 60%; 60 to
90%; and above 90%. Recent observations in that top bracket come from Belgium,
Greece, Italy, and Japan.
The main finding of that study is that the relationship between government debt
and real GDP growth is weak for debt-to-GDP ratios below 90% of GDP. Above the
threshold of 90%, however, median growth rates fall by 1%, and average growth
falls considerably more. The threshold for public debt is similar in advanced
and emerging economies and applies to both the post World War II period and as
far back as the data permit (often well into the 1800s)."
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