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Debunking Eurozone Optimism

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I sometimes wonder whether Wolfgang Munchau of the Financial Times and Ambrose Evans-Pritchard of the Telegraph channel each other. Although they are both dubious of the eurozone’s ability to navigate its way out of its current mess, they also have an interesting habit of taking up similar issues on the same publication date.

Today, both writers focus on last week’s spurt of optimism about the eurozone’s prospects, particularly stronger than expected economic results out of Germany. Both writers took it upon themselves to parse the optimists’ case and found it sorely wanting.

Evans-Pritchard takes two thrusts: the good news for Germany is not anywhere as good as it appears for the rest of the eurozone, and the good German performance is also unlikely to be sustained at this level:

Jean-Claude Trichet, head of the European Central Bank, last week cited this Wirtschaftswunder as evidence of durable recovery in Europe. It is no such thing. The OECD’s leading indicators for June rolled over in Italy and France, as well as China and India.

The IMF expects Spain’s economy to contract by 0.4pc this year. It has lowered its forecast for the eurozone from 1.5pc to 1.3pc in 2011. “Downside risks to the recovery have risen sharply,” it said….

Yes, Germany is on the cusp of EMU “outperformance”, but that is more curse than cure for Club Med laggards. Germany is benefiting from a currency that is as misaligned as China’s yuan, though this mercantilist advantage is disguised within Europe’s monetary union. Crudely, Germany is doing to Spain, Italy, and increasingly France, what China has been doing to the rest of the world – but more so – by holding down its exchange rate….

Be that as it may, we now have an untenable socio-strategic situation in which German unemployment has been falling for 12 months in a row to 7.5pc, while Spain’s unemployment has vaulted upwards to just under 20pc. This immense gap – with everything it implies about the state of a society – has surfaced in little over two years.

The delayed effect of German wage discipline over the years has at last hit EMU with volcanic force. The same time-lag is underway in Spain with opposite effect as the property slump grinds deeper. Wishful thinking lingers, but the harsh truth is that the Spain’s housing crash has barely begun. The Madrid consultancy RR de Acuna sees an implicit overhang of 1.6m housing units. It will take six years to clear. By cruel contrast, Hans Werner Sinn from Germany’s IFO Institute said his country is on the cusp of a property boom. “Germany is the winner of this crisis,” he said….

The IMF is frankly in a muddle as well on the big picture. Its World Economic Outlook said the surpluses of Germany, China, and Japan, will rise from $586bn (£377bn) last year to $758bn by 2015, perpetuating the imbalances that led to the credit crisis.

Brian Reading from Lombard Street Research said that if this occurs, it assures a global slump because the deficit states of the Anglosphere and Club Med cannot keep the game going by adding further debt. They must retrench, and therefore global demand must implode. The IMF evades the conclusions of its own logic.

Cheery, that.

Wolfgang Munchau contends that robust-looking eurozone results are due to factors that are in large measure are about to go into reverse:

During the first half of 2010, the eurozone enjoyed nominal short-term interest rates of near zero, a big fall in the euro-dollar exchange rate and an expansive fiscal policy. Those three factors contributed to a recent increase in industrial orders in Germany, and resurgent optimism in that country’s business community.

As we enter the second half of the year, two of the three factors are changing. First, we are now seeing a policy-driven tightening in monetary policy… what matters is the Euro Overnight Index Average (Eonia) money market rate, which until recently had been trading at 0.3 per cent. As a result of a recent shift in liquidity policy, the Eonia rate spiked to 0.5 per cent last month, and has since fallen to 0.4 per cent.

Some economists, who have done the maths on this, have calculated that the tighter liquidity conditions will gradually push the Eonia close to the repo rate, the ECB’s official policy rate – which is currently 1 per cent….

Second, the recent increase in the euro-dollar exchange rate means that the euro is no longer heading in a direction that would generate a positive demand shock for products manufactured in the eurozone.

Note that Muchau sees this as adding up to a Japan-style low-growth outcome; Evans-Pritchard expects worse due to the pressures of private sector deleveraging and increasing political tensions as Germany-dictated policy looks increasingly good mainly for Germany.

But higher money rates in the eurozone also suggest that, if investors decide they like the results of the ECB bank stress tests results, due later this month, the euro could continue to rise near term.

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61 comments

  1. renting_in_paradise

    ‘Crudely, Germany is doing to Spain, Italy, and increasingly France, what China has been doing to the rest of the world – but more so – by holding down its exchange rate…’

    Except that Germany’s exchange rate is exactly – no, precisely – the same exchange rate as that of Spain, Italy, and most certainly not increasingly France. All four nations use the euro, both between themselves, and for exports. And what is even more bizarre is the idea that a nation that exports goods, like France, would find a lower exchange rate bad for business. The eurozone faces any number of problems, but the idea that a single currency brings different benefits in those areas where the nations engage in precisely the same activity, such as exports, seems bizarre.

    But then, this is written by the man that reported, several years in the past, that Germans were scrutinizing their euro bills to see whether they were issued by nations south of the Alps. A bit of information which has yet to be repeated by any other source. Or even confirmed by a single person actually living in Germany.

    1. Yves Smith Post author

      renting,

      You need to bone up on the issues here before taking pot shots. Germany has effectively achieved an internal devaluation:

      http://www.creditwritedowns.com/2010/05/the-soft-depression-in-germany-and-the-rise-of-euro-populism.html

      http://www.creditwritedowns.com/2010/06/questions-internal-devaluation-work-europe.html

      Fistful of Euros has even more along these lines.

      Germany’s persistent trade surplus within the eurozone is tanatmount to it having an overly cheap currency in a gold standard regime.

      1. reskeptical

        Well Yves, what’s the solution? Follow the so-called Anglo-saxon model? More integration across Europe, subsidies and backfilling– in short increased reliance on the finance industry?!

        No! The solution is to continue with the plan. Europe has to maintain and increase its competitiveness and that may mean some European states falling off the back of the union. Why can’t France (or the “Southern European countries”) be as competitive as Germany? There’s no reason why they can’t. They have to at least make an effort.

        There can be no politics without an economy based on reality, an economy which has problems which needs real solutions.

      2. renting_in_paradise

        ‘Germany has effectively achieved an internal devaluation’
        By having German workers accept wage discipline? By investing in worker training? By ruthlessly attempting to ensure that its manufacturing base is as productive as possible? By using Kurzarbeit to keep its manufacturing base functional? I could go on, especially with the idea that Germany actually manufactures products which other nations don’t – electrical infrastructure comes to mind as an example.

        The fact that the word ‘Anlagebau’ isn’t easily translatable into English might be a hint – ‘Der Anlagenbau ist ein technisches Geschäftsfeld, dessen Ziel es ist, technische Anlagen zu realisieren.’ Readers are welcome to translate that first line from the German Wikipedia entry – it has always caused me problems, in regards to ERP software (another German innovation, assuming we consider SAP the groundbreaker).

        And this idea of accounting entity remains suspect – if a German company like Siemens is deeply involved in increasing the efficiency and reliability of another country’s electrical grid, then the reasonably assumed resulting increase in that country’s economic capability is reflected in increased economic activity, it is further reasonable to assume that the country will be able to pay for such infrastructure. But then, the improvement in Spanish infrastructure (for one concrete example) goes completely unnoticed when talking about accounting entities. Not that Spain isn’t full of misallocated investment, of course – but then, considering just how poor Spain was in 1980, there was an incredible amount of investment to be made.

        1. reskeptical

          renting_in_paradise, don’t get too carried away. Germany most certainly does use vendor capitalism to help manage manufacturing demand– Germany has a very long tradition of doing this and this is an activity not without problems– look at Greece now and cast your mind back to Siemens, Daimler, etc. corruption scandals of recent years.

          There is a fine line between what you call wage discipline and the exploitation of labor. (This I think is one of the issues related to French criticism of Germany). The irony however is that labor conditions in general are much better in Germany than they are, for example, back in the States.

          The common ‘enemy’ is the financial services industry.

          1. renting_in_paradise

            ‘Germany most certainly does use vendor capitalism to help manage manufacturing demand’
            Not to mention bribery, which until recently was a tax deductible business expense in Germany. And to remain on the level of how things actually work in the world, so?

            Germans make things – and strangely, there seems to remain a market for rail equipment, buses, industrial chemicals, etc., regardless of exchange rate movements. Especially if formerly major competitors in these areas have removed themselves from the global market (financial engineering is the Anglo-American preference, it seems), or if up and coming competition continues to cut as many corners as possible to make a fast yuan.

        2. jdmckay

          I could go on, especially with the idea that Germany actually manufactures products which other nations don’t – electrical infrastructure comes to mind as an example.

          I’ve said this over and over here, always falls on deaf ears. As “an Economist” says down thread:

          The competitive position is a combination of product mix, productivity, cost base, exchange rate and export market growth.

          All this echange rate is god “analysis” ignores all the other factors he lists above. Your analogy of the electrical grid is a very good one, and disparity in investment in this “stuff” between US & Germany/Nordic Countries/China like difference between night & day.

          WSJ had on OpED article on Friday regarding US Innovation w/in basket (from memory) of 40 industrialized countries. By author’s account, US was… 40th. This survey also exemplified trend of US University quality as major component of the trend… again something I’ve pounded home here again and again, all to deaf ears.

          The idea that a currency’s real value is directly related to value of it’s underlying production seems (amazingly to me) severed in US/British econ circles… the disconnect is profound.

          Deconstructed, using these exchange rates as sole descriptor/predictor of utterly undefined economic activity underneath each… seems to me the implicit “free trade” & “captitalist” advocates of “more domestic consumption” and “diminished exports” are really advocating a world economy socialist rebalancing… “fairness”.

          We (US) entirely gutted our growth engines, ignored what mattered most (energy/grid/water/education/trained workforce), and finally at this point left w/out infrastructure and w/out leading technology to meet problems… we’ve got paper value under-girded w/very dubious real economic activity.

          f a German company like Siemens is deeply involved in increasing the efficiency and reliability of another country’s electrical grid, then the reasonably assumed resulting increase in that country’s economic capability is reflected in increased economic activity, it is further reasonable to assume that the country will be able to pay for such infrastructure.

          Exactly. One think, in more honest times, this is simply common sense.

  2. an economist

    @renting_in_paradise

    Germany is not holding down its nominal exchange rate, this is indeed fixed relative to the other members of the eurozone. However, by exercising wage restraint over the past couple of years, Germany held down its real effective exchange rate relative to its European trading partners. Although this is not the same as an actual devaluation, the Southern European trading partners do regard it as such. They feel German wage restraint and structural reforms the past couple of years amounts to a competitive devaluation. The only way these countries can regain their competitiveness again is going through the same exercise: deflating wages in order to become more competitive again.

    Furthermore: Germany is more competitive than its Southern European trading partners in its intra-EMU exports. Furthermore, Germany has a large exposure to non-EMU countries with strong growth hence a weaker euro would benefit it disproportionately as well. Therefore a weaker EUR will help the north of Europe (competitive + high exposure to non-EUR countries) a lot more than it will help the South.

    Conclusion: nominal exchange rates within EMU might be fixed, this does not mean every country’s competitive position is the same. The competitive position is a combination of product mix, productivity, cost base, exchange rate and export market growth.

    1. Yves Smith Post author

      Thanks for going to the trouble of giving a long form explanation, that is much easier for readers.

    2. Jim Haygood

      As an aside, Puerto Rico offers a dollar-zone analogy to the plight of Club Med countries within the euro zone.

      Labor productivity is lower in Puerto Rico than in the U.S. mainland, but Puerto Rico is stuck with the US dollar as its currency, as well as the U.S. minimum wage and much of the regulatory burden.

      Consequently, without subsidies, Puerto Rico’s uncompetitive industry and exports have dwindled. Tourism receipts and government spending have become mainstays of the slumping economy.

      Sound familiar? How do you spell relief — D-E-V-A-L-U-E !

    3. Diego Méndez

      an economist,

      you have explained very well the situation as of today. I would add the fact that Germany has not done much in the way of deficit spending, which would help the whole of Europe.

      All this spells a very difficult period (in terms of unemployment, companies going under, etc.) in the very short term.

      However, in the medium term, Southern European countries can and will adjust very fast to the new circumstances. E.g. productivity is booming, as well as exports.

      The lack of solidarity from Germany will just make the adjustments more painful. Well, Germany makes the rules. We’ll just take note, and apply the rules to Germany when convenient.

      1. Detlef

        How do you define “not much deficit spending”?

        Germany went from a balanced budget in 2007 and 2008 to a 3+% deficit (in relation to GDP) in 2009. That was Euro 80 billion in new debts.

        Roughly 50% of the cars sold in the German “cash for clunkers” program in 2009 for example (which was copied by the USA) were “foreign” EU cars (SEAT, Skoda, FIAT, Renault, Peugeot).

        Or look at France and Italy for example, two other populous Eurozone members. Their deficit too was raised by only around 3-4% from 2008 to 2009.
        Why was the German 3+% too low while the French and Italian 3-4% was alright?

        Forecasts for 2010 mention a 5+% deficit for Germany.
        The German Federal Statistics Office reported in June 2010 that the federal deficit in the first quarter 2010 was Euro 10 billion higher than in the first quarter 2009. So that 5% number might be realistic.

      2. Diego Méndez

        Detief,

        the global recession deserved a European-wide 10+% deficit, as was done e.g. in the US.

    4. renting_in_paradise

      ‘However, by exercising wage restraint over the past couple of years, Germany held down its real effective exchange rate relative to its European trading partners.’
      Or practiced effective policies? – this is not a ‘devaluation,’ this is simply continuing to follow a path of higher productivity. And to think that just a decade or two ago, Germans were being told that restraint in worker compensation was a necessary component of remaining competitive. And amazing – they take that suggestion to heart, it turns out to be true, and now people are complaining that being a more efficient and cost effective manufacturer is unfair, it being the equivalent of devaluation. I find this bizarre – almost as if Intel was devaluing its processors by improving its processes, an analogy I have yet to see anyone write.

      ‘The competitive position is a combination of product mix, productivity, cost base, exchange rate and export market growth.’
      Which means some are winners, and some are losers? But remember, this started with the idea that Germany is ‘devaluing’ against its various competitors, when the reality seems to be that Germany is simply continuing to follow a path which leads to profits selling manufactured goods. And strangely, somehow, there is this dim memory of being taught that is a good thing, an admirable process leading to progress – you know, universal health care, longer vacation time, etc. Back when the U.S. was the world’s leading exporter of manufactured goods, that is. Childhood memories die hard, I guess.

      1. Diego Méndez

        renting_in_paradise,

        the problem is not wage restraint per se. In ordinary circumstances, that’s a good thing.

        The problem is a whole range of policies that make net exports, instead of investment or consumption, the only motor of German economy.

        Here we can include favouring taxes affecting imports, consumption and investment (VAT) over taxes affecting exports (Social Security); policies making immigration difficult (no population growth = no consumption growth); policies limiting competition in the retail and service sectors (too expensive = low consumption); no strong stimulus plans (“strong” as in over 10% deficit); insufficient competition in the banking sector (limiting credit, hence consumption) and a legal framework working against international investments (limiting investment).

        By the way, German productivity has decreased, not increased, as a consequence of these reforms.

        German per-employee productivity stood at 112.6% EU average in 1998, compared to 105% in 2009.

        On the contrary, Spanish per-employee productivity has grown from 107.8% in 1998, to 110.7% in 2009.

        http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tsieb030

        1. Detlef

          This is difficult because I actually agree that Germany needs more consumption to help its domestic market.

          Still…

          “Here we can include favouring taxes affecting imports, consumption and investment (VAT)…”

          Uhh, only a few EU countries have a lower VAT rate than Germany. As in Spain, Cyprus, Luxembourg, the UK and Malta. The Netherlands, Romania and Slovakia like Germany have a rate of 19% too. All other EU countries actually have a higher VAT rate. Up to 25% in Denmark, Sweden and Hungary.

          “policies making immigration difficult (no population growth = no consumption growth)”

          Principally right in the middle and long term. But which country with high unemployment right now wants higher immigration?
          You could also mention the household savings rate?
          Around 12% in Germany I believe? Quite a bit lower in some of those “consumption paradises”?

          “policies limiting competition in the retail and service sectors (too expensive = low consumption)”

          Well, maybe…
          Of course Walmart tried to enter the German retail market in the early 2000s. And left after several years of losses because they just couldn´t compete. As in their prices were undercut every time by competitors.
          And you probably never heard about the “Niedriglohnsektor” (low wage sector) in Germany and especially the service sectors. Which because of its low wages (= NOT expensive) is seen as a problem here in Germany.

          “no strong stimulus plans (”strong” as in over 10% deficit)”

          In that case only Spain, Ireland, Greece and the UK qualify. With Portugal and two of the three Baltic States around 9%.
          You do notice that most of the countries with a 10+% deficit had a housing bubble? Maybe explaining part of the deficit?

          ” insufficient competition in the banking sector (limiting credit, hence consumption)”

          That is nonsense!
          Around 60-70% of all bank accounts (consumers and small to middle sized companies) in Germany are with local savings banks and credit unions. Most of them too small to have been involved in questionable financial products. And the savings banks in 2009 actually raised their credit volume. However if you want a credit, they insist on a personal interview. :)
          You know, comparing income to expenses to see if you can pay back the loan. Pretty outlandish, right?
          The large German banks serve only a minority. Among them the large German companies.

          “a legal framework working against international investments (limiting investment)”

          ???
          I don´t understand that statement. Unless you mean – in the spirit of the soccer World Cup – investment in German soccer clubs? :)
          Limited to 49% ownership unlike England.
          How is German investment abroad or foreign investment in Germany limited?

          “By the way, German productivity has decreased, not increased, as a consequence of these reforms.”

          I don´t know about the long term trend.
          But of course productivity has decreased in the last years. A simple consequence of the “short time work program” (part of the stimulus program) initiated to minimize unemployment during this recession. More employees (even part time) doing less work means productivity will decrease automatically.

          1. bs23

            I’m not sure I can agree with the arguments making the situation out to be Germany’s “fault” (much as I wanted to when reading this thread.) It’s definitely hard to understand why cutting labor costs is a bad thing in this scenario. Seems like run of the mill competition.

            On the other hand, surely Soros is right (in the article linked to here previously) that the DE-Euro would appreciate considerably if cut loose from the rest of the Euro, no? Thus, there’s some kind of disequilibrium in the current setup. Where’s this currency pressure going if not into increasing the value of the DE-Euro?

            All I can come up with is that the rest of the Euroland is simply willingly trading at 1:1 even though they’re taking it on the chin in so doing. That is, they are willingly increasing their own export prices substantially. Sure, Germany benefits, but it’s not their fault the other countries don’t devalue.

            Not sure how this monetary union is supposed to work when the different parties can play off each other in this manner. I don’t see the national parliaments voting for pan-european laws which are a (big) net negative at home. That’s what the european parliament is for.

          2. Diego Méndez

            Detief,

            - on VAT:

            one important export in Southern Europe is tourism. If Spain hikes VAT, it favours some exports (e.g. consumer goods) over another kind of export (tourism).

            But when Germany hikes its VAT, it only favours exports over domestic demand, since Germany has no significant international tourism industry.

            Thus, a high VAT in Germany and The Netherlands have a powerful effect on exports, unlike elsewhere in the eurozone.

            - on immigration:

            a 7% unemployment rate is not high. Spain was receiving 700,000 immigrants yearly (one out of two immigrants to the EU) with 10+% unemployment.

            The household savings rate is as high in Spain as in Germany. What you don’t understand is that Germany sends savings abroad (5% GDP) because investment in Germany is somehow limited, while Spain welcomes international savings (10% GDP in good times, 5% GDP now).

            What you call overconsumption was, in fact, overinvestment. Spain’s investment was 30% GDP vs. less than 20% for most Western countries.

            Yes, we had a housing bubble, but also a highway bubble, a green-energy bubble, an office bubble, an internationalization bubble, a M&A bubble, a high-speed train bubble, an airport bubble, a private-university bubble, a science-park bubble…

            So much money has been invested in Spain, so much has been built, over the last decade… yes, it was a bubble. But the benefits of those investments are very real, especially when considered in the long term.

            With 400m Spanish-speakers around the globe ready for emigration, I can’t foresee houses (or office skyscrapers, or university buildings) being bulldozed as in East Germany.

            “policies limiting competition in the retail and service sectors (too expensive = low consumption)”

            There’s more to retailing than Aldi and Lidl, and there’s more to competition than price.

            200m from my house in Southern Madrid, I’ve got 4 different supermarkets: Dia, Aldi (crappy food, no Spaniards shop there), Mercadona and a local chain. That’s not the kind of density and competition you find in Germany, where there are many limitations: closing times, construction pre-approvals, a powerful small-shop-owner lobby…

            In the case of other services, you need many years of education, e.g. hairdresser. (Let’s not talk about lawyers!). This makes for inefficiencies and lack of competition.

            - on stimulus:

            of course those countries which saw its unemployment explode were faster to accept higher deficits. But on aggregate, Europe should have done as the US and pushed for a 10% Europe-wide deficit budget.

            Solidarity at the European level has failed. Spain will just take note and apply the same policy to others in the future.

            ” insufficient competition in the banking sector (limiting credit, hence consumption)”

            “That is nonsense!”
            “Around 60-70% of all bank accounts (consumers and small to middle sized companies) in Germany are with local savings banks and credit unions.”

            Credit is limited in Germany. That’s a fact.

            Competition among banks is limited in Germany. That’s why successful, innovative local banks can’t scale up and bring better credit conditions to the whole of Germany.

            I have worked with Spanish and German banks. The terms and conditions offered by German banks are outrageous by Spanish standards. I open an account and you charge me? I use your credit card and I have to pay you a maintenance fee on top of commissions? Are you nuts?

            Yes, the Spanish banks went a bit too far. But Spaniards benefitted from it, unlike Germans with your German Landesbanken buying US toxic assets. German banking now is as it was 30 years ago.

            - on limitations to international investments in Germany:

            Can you easily build anything in Germany? A road, an airport, a chemical plant, a department store?

            It’s not easy. In fact, it’s nearly impossible (unless you are one of the big German exporters, then you can bribe the press into it).

            - on productivity:

            Spain’s productivity (per employee, or per hour) has increased vs. EU average in the last 10 years, while creating *millions* of new job posts.

            Meanwhile, Germany has *reduced* its productivity while not creating significant employment.

    5. Ignacio

      “Conclusion: nominal exchange rates within EMU might be fixed, this does not mean every country’s competitive position is the same. The competitive position is a combination of product mix, productivity, cost base, exchange rate and export market growth.”

      I like your take, but it seems that most economists only think of productivity and, further more, they focus on salaries as it was the only factor affecting productivity. This bias on salaries as the unique factor determining competitivity is not only a rigth-winged thing, but also serves to hide the lack of capabilities (how to organize and lead a company) of many business managers.

  3. a

    “During the first half of 2010, the eurozone enjoyed … a big fall in the euro-dollar exchange rate… As we enter the second half of the year … the recent increase in the euro-dollar exchange rate means that the euro is no longer heading in a direction that would generate a positive demand shock for products manufactured in the eurozone.”

    Oh give me a break. The current level of the euro vs usd is now weaker than it was in all of January, February, March, April, and some of May 2010. Only in most of May and June 2010 was the level weaker than it is now. So Europe is still benefiting from a better exchange rate than it had for the first half. Pity how op-ed writers feel the need to distort reality to make than point stronger than it actually is…

    1. borkman

      I don’t have access to a Reuters or Bloomberg feed to give me 6 month and 12 month forward rates, but I suspect you don’t either. I’d bet forward rates have moved more dramatically than cash rates, and may well add further support to the comment. Trade has longer time horizons, if buyers who thought the euro was going to parity now think it might rally further, they will think about their supplier relationships differently.

      1. a

        6-month and 12-month forward eur/usd rates can be calculated using 6-month and 12-month eur and usd interest rates. Theses interest rates have been under 1% the entire time, so their effect on the forward rates is minimal.

      2. a

        My previous reply was probably incomprehensible except to someone who already understands it, so let me try again.

        The forward eur/usd rate at x is a function of the spot (current) forex rate and the eur and usd interest rates from now until x. When both interest rates are close to 0, as they are now and have been for the past 8 months (at least), the forward rate will be very close to the spot forex rate. So going to the forward rate does not improve Munchau’s argument.

        1. Detlef

          And I don´t quite understand the problem here?

          When the Euro was at $1.5 – 1.6 everyone (including the FT, The Economist and the WSJ) said that the Euro was totally overvalued. And that the true exchange rate (according to PPP) was around $1.2 – 1.3.

          Now it is around that value the exact same financial papers scream about a devalued and worthless Euro? The Eurozone somehow is cheating and using the “low” value of the Euro to boost exports.

          While the Bank of England back in 2009 was praised for engineering a fall in the value of the British Pound? Hopefully boosting British exports?

  4. PDC

    Just a couple of thoughts.

    1) Looking at the numbers of tourism receipts and expenditures of some EU nations, one notice that in 2009 (in $):

    Germany: 34.7 – 80.8 = – 46.1 billions
    Italy: 40.2 – 27.8 = +12.4 billions
    Spain: 53.2 – (missing data) = +25? billions
    France: 48.7 – 38.9 = +9.8 billions

    So, some form of redistribution is probably due to tourism.

    2) In some way, “lesser” nations behave towards Germany like “linked industry” towards a big company. They need it to be competitive worldwide in order to survive.

    1. PDC

      In order to make the second point more clear: I don’t think that German “equivalent devaluation” has radically changed the structure on intra-European market. In order to test this propositions I have had a look to Italy’s commerce data from 2001 to 2009 with Germany, France, Spain and UK. Now, import and export values are, in all cases, almost parallel curves. The only significant divergence is with Spain (Spain has somewhat reduced its negative balance with Italy).
      Mmmm…

    2. PDC

      More digging… look here:

      http://epp.eurostat.ec.europa.eu/portal/page/portal/external_trade/data/main_tables

      and select:

      Intra-EU27 trade, by Member State, total product

      One can find the intra-EU trade balance per year and state.
      Examining the data for each state over the entire period (better to save data as excel file and then plot them)the conclusion is (for the period 2001-2009):
      1) Germany and Netherlands have significantly increased their positive trade balance, at the expenses of France, UK, and Greece.
      2) Italy, Portugal, Belgium, Ireland, Poland have stayed more or less stable.
      3) Surplus of Germany and Netherlands did reach a maximum in 2007, now appear to be dropping, while there is a recovery for France, UK and (especially) Spain.

      I’m sorry I can’t paste the graph in this post.

  5. Hubert

    Germany started in Euroland with an exchange rate “somewhat too high”. It now, after more than 10 years of wage restraint and organizational persistence, enjoys a very competitive cost structure. So far, so good.

    Now, competition: Generalizing crudely, the main competitor with a industrial base is Nothern Italy. France, lesser so, Spain even less. Greece: certainly not! Germany and Greece are not in direct competition, so any level of D-Mark or Drachma exchange rate is nearly irrellevant in competitive terms.
    Germanys main advantage vs Italy is less the level of labour costs – which are high in both countries now. It is more the good international integration of German companies with production facilities in still cheap Eastern Europe and distribution all over Asia. And for sure, China, as a big direct and indirect customer.

    German officials are naively wondering why they get this bad rap in Anglo-Saxon press as they were playing by the rules (a short injury of Maastricht terms notwithstanding). Now the EURO realities need some adjustment mechanism (as “surprisingly”, other countries disobeyed the rules) and is surely lacking one. The Germans were happy for having rules and the French, somewhat smarter, were happy to have Trichet at the post at an ECB board where Germany is sure to be outvoted. (Weber as sucessor or not, will not change a lot)

    So, playing by the rules, Germany, lost the game already. Now, will Germany having been cheated already, be a good European and behave nicely (“gute Miene zum bösen Spiel”) or will they call the foul play and risk Europe becoming disintegrated, or less integrated, certainly with more than one currency?

    Whoever watches German politics (Except Munchau maybe) knows they (all the current parties, except the far left maybe) will sell-out german interests for ideological-historical reason; in fact they have already in May 2010. This is the crucial thing non-understood: this game, which Munchau likes to quarterback, is already over.

    The interesting thing is what will come next: Merkel will lose elections, a new government will show up and with it a new opposition. Anti-European oppositions will show up quicker in other countries and I am curious how they will be surpressed.

  6. kaan

    The Anglo-Saxon elites are determined to continue their Ponzi scheme until the very end. Even our dear host is engulfed by this Goebbelian “Big Lie”.
    Putative savings glut in Japan, China and to a lesser extent
    in Germany is the effect of Ponzi dynamics in AngloLand. The causality goes from credit creation mechanism in AngloLand to the suppliers of Exportland.
    Stop the Ponzi game in US and UK, the surplus will disappear.

  7. Hubert

    And yes, I nearly forgot:
    Hans Werner Sinn from Germany’s IFO Institute said his country is on the cusp of a property boom. “Germany is the winner of this crisis,”

    I cannot resist: Sinn does not make sense.
    Only a professoral economist (of the worst kind: “Volkswirt”) at a Research institute can provide such a nonsense.

    1. Detlef

      That guy is an idiot!

      Wasn´t he the economist back in 2004 or so saying that German potential economic growth was limited to around 1%?
      So growth in 2003 / 2004 was already at the upper limit? Don´t be disappointed German citizens, it´s the best Germany can do.

      Followed by several years above his “limit”. And lower unemployment rates year after year.

      Must be a problem with the German media. Once declared an expert, always an expert in the future. And don´t mention his wrong forecasts from the past. That might destroy the confidence of the viewers.

  8. Joseph

    Dear Mrs Smith
    they both have a few factors in common
    both british
    both hiding any info they have about the corrupted finances in the City
    both being serfs of the City
    both ignoring factors that are not finantial, in fact, they dont have a clew of what trade of goods is
    Lets face it, Most countries in Europe are improving their trade balances and current account balances, by importing less and importing more; even Spain, where exports have soared 18%, and it keeps on improving
    Hellas¡¡ the only big country not doing is… ( and the winner is…) the UK¡ This country depends on its finantial industry in the City and Leeds, if that goes, the last jewel of the crown is gone; Theres a movement worldwide, within the middle classes, to end the game with the imprudent, fraudulent, cheat and greedy banksters; Middle classe world wode know, we are the target for them, so we will fight with teeh and nails for our survival
    Add to the tale, that both are reputed euroskeptics, that try to save the sterling from disappearing, as if never had existed
    So, concluding, should you look for fairness, evenness and well balanced information, not in the Telegraph, nor in the Finantial Times
    keep well mylady
    from sunny Barcelona, Spain

  9. Diego Méndez

    Dear Yves,

    much like in soccer, reality will trump national fantasies.

    Germans are oblivious to the fact that Spanish productivity per employee is already higher than theirs.

    The Spanish economy is highly diversified (much more so than the German one), with a very dynamic labour market (that’s why unemployment explodes in recessions!), a relatively young population that has been accepting mass immigration relatively well, and increasingly educated workers.

    More importantly: unlike Germany, Spain accepts international credit and investment. Germans will never have an investment boom fueled by international credit, because they despise it as a bad plague, “Heuschrecken-plagen”.

    As of now, Spanish GDP has not fallen as much as German GDP in the crisis. Beware of bond spreads: it may be that, not so long from now, we’ll be talking about how German bonds are riskier to the markets than the Spanish ones.

    It happened already some years ago. Why not again?

    1. Joseph

      Dear Diego, top of the pops of adventure sport now is shoot the PIGS
      They are diverting the attention on their own, massive banking and finantial problems, here are some media lying
      The Telegraph, The Finantial Times, The Wall Street Journal, The Economist….
      poor lads, son tan pobres que solo tienen que dinero¡
      by the way, is a catalan subject telling you this, not a fulltimeclassicalspaniardwithaxssedjacketandaflashytie
      keep well

    2. Detlef

      Could you explain that?

      “Germans are oblivious to the fact that Spanish productivity per employee is already higher than theirs.”

      As I said above, the “short time work program” might have something to do with that.
      It´s the difference between 6.8% unemployment (ILO numbers) and 20% (?).

      “The Spanish economy is highly diversified (much more so than the German one)..”

      Could you give some examples here?
      As in, how you are exporting almost as much as China? :)

      “More importantly: unlike Germany, Spain accepts international credit and investment. Germans will never have an investment boom fueled by international credit, because they despise it as a bad plague, “Heuschrecken-plagen”.”

      You do recognize that you had a housing bubble?
      As in, your precious investment boom wasn´t grounded in anything durable but in “house prices will always go up”. Just like in the USA and a few other countries.
      If Germany doesn´t accept “hot” money just trying to get the highest return in the shortest possible time, I´d say good for Germany.

      “As of now, Spanish GDP has not fallen as much as German GDP in the crisis. Beware of bond spreads: it may be that, not so long from now, we’ll be talking about how German bonds are riskier to the markets than the Spanish ones.”

      Maybe but German exports are rising in 2010.
      Not to mention that German foreign assets are still a lot larger than German liabilities.
      Not to mention that the German household savings rate would be enough to buy German foreign debt on their own.

      And didn´t you say in an earlier comment that Germany was at fault for not going for a 10+% deficit? If you really expect that “not long from now” “German bonds are riskier to the markets than the Spanish ones” then you seem to advise Germany to self-destruct?
      Borrow money now to help Spain and then deal with higher spreads?

      1. Diego Méndez

        I’ll explain everything with the greatest delight :)

        “As I said above, the “short time work program” might have something to do with that.
        It´s the difference between 6.8% unemployment (ILO numbers) and 20% (?).”

        Spain has more people working now than 10 years ago. That’s not true for any other European country.

        It’s easy to have less unemployment when you’ve got more old people entering retirement than young people to replace them.

        It’s a lot more difficult when your population grows from 39m people to 47m people in just a decade.

        To put it in other words: our productivity (per employee, or per hour) has increased vs. EU average in the last 10 years, while creating *millions* of new job posts.

        Meanwhile, Germany has *reduced* its productivity while not creating significant employment.

        “The Spanish economy is highly diversified (much more so than the German one)..”

        Could you give some examples here?
        As in, how you are exporting almost as much as China? :)

        Of course I can. Germany’s exports are basically capital goods and cars. Spain’s exports include food, tourism, cars, capital goods, etc.

        Hence, Spain’s exports are more diversified. Spain’s economy is even more diversified (finance, retail, etc.).

  10. pigeon

    It is quity funny to see these authors complain about Germanys perceived strength. Especially Munchau was calling for big government stimulus in Germany and failed to see that it was long underway through implicit and explicit meausures as discussed on this blog.
    But regarding the imbalances and their bad consequences they should be on target. What to do about it? The exchange rate is fixed in the EUR system. The only solution could be to raise wages but in a manner that will not have these permanently elevated. This is happening in some companies through bonuses that were previously rather uncommon for normal workers. Workers get a share of the profits and when things turn bad again, they get their original wages.
    It is this kind of newly found flexibility combined with security that has made the german labour market astonishingly resilient during the crisis. The german government should now encourage generous wage increases on a temporary basis.

  11. Tortoise

    I am optimistic about the eurozone. Why, 3 out of the semi-finalists in the World Cup were euro countries and the winner was Spain!

    OK, every place has its problems but Europe has a stability that helps its citizens weather financial crises better than in more dynamic but also volatile countries. The euro is certainly not undervalued — so I do not see how it can be compared to the yuan. As for Germany, I think they chose to be the industrial superpower of Europe and are paying the price while others made different choices and they have to deal with their consequences of their decisions. It is just wrong to say that industrial power is the only way to financial success. Furthermore, industry is not just expensive cars… Most of the products people buy are made in their own countries (food, beverages, housing, services, and entertainment). Let us stop repeating the myth that only Germany produces, much as I like German industrial products.

    1. Joseph

      One tends to forget, or ignore, that outside Germany, there are a few enourmous industrial areas in Europe, and not so low cost as it may seem
      Italy
      big and wide chanel between the Piamonte, Lombardy and the Veneto
      Tuscany, Prato province
      Spain
      Girona, Barcelona ,Tarragona, down to Valencia, and the Basc country
      Portugal, Porto Guimaraes
      Also one tends to forget, that these 3 countries, together with France, are the main source of agriculture, and more important, agro-industries; Without them Europe would starve
      lets consider last years GS movement on food commodities, if that is to be repeated ( and it will) whoever has food, it will be as important as having its own energy
      Despite the great efforts of the bog corporations ( Monsanto, Cargill…) to sink european agriculture, they have failed
      keep well

      1. Diego Méndez

        Joseph,

        the problem with Germany is, I think, they despise any industry different from manufacturing. This probably has to do with powerful German exporters’ influence on German media.

        I mean, Spaniards get crazy when Spain wins a soccer cup. German media get crazy when Germany is “Export-Weltmeister”, world champion in exports.

        But having efficient non-manufacturing sectors is just as important. Efficient corporate services, retailing, banking, tourism and construction are as important and necessary for the economy of the future as is manufacturing.

        All its misconceptions (e.g. about the sinfulness of credit) underlie its main structural problem: Germany is German exporters’ labour colony.

  12. Jermaine

    The big gap between Germans and Spaniards is the gap in earnestness. When confronted with the the dire economic prospects of their country, Spaniards react with delusions and conspiracy theories. Germans, on the other hand, do their homework, as they did after suffering years of stagnant growth after unification. Investor confidence in Germany has much more to do with the belief that the Germans will find a way to succeed than with any specific indicator.

    1. Diego Méndez

      Jermaine,

      earnestness like in “blühende Landschaften”, the flowering landscapes which were promised to East Germany (now almost an industrial desert, with huge chronical unemployment, mass emigration and social problems leading to xenophobia and nazism?).

      Or earnestness as in reforming the labour market, slashing spending and public salaries, making the whole of Europe publish its stress tests, reform the public banking system (ousting politicians and welcoming public capital), reforming the public-pension system, etc. all in just 3 months and with many more reforms to come? And with no massive protests, by the way.

      But the second one is Spain, not Germany, isn’t it?

      When will Germany reform its Landesbanken? When will it reform its service sector? When will it confront East Germany’s illness? When will Merkel make a single structural reform?

      I suppose it’s very much like the “earnest” analysis in German newspapers about how they would win Spain. It all looked just right in theory; but then came reality.

      1. Jermaine

        You’re comparing West Germany absorbing 16 million much poorer East Germans virtually overnight, one of the most difficult and amazing accomplishments in modern history, with the Spanish government being force to act along with other EU countries to reign in spending after it was left with no choice?

        The whole conversation is pointless. Spain is only a developed country today because of transfers from and attachment to Northern Europe. Spain’s economic (real estate) boom of the 2000s happened after joining the euro and thus gaining access to low interest rates priced on the stability of the German economy. Anti-German rhetoric from a Spaniard is just ludicrous.

        1. Diego Méndez

          Jermaine,

          do you think you are being really “earnest” when considering a mass depopulated, politically radicalized, industrial area “an accomplishment”?

          Don’t you realize that countries like the Czech Republic have jumped ahead, economically and socially, with no massive transfers from Western Germany? Don’t you realize the same fate was reserved for East Germany?

          Spain got developed in the 60s, after a disastrous war and 20 years of international isolation (including a Western embargo on Spain). No Marshall Plan for Spain, only embargo.

          Now can you tell me how receiving 1% GDP in structural funds, in exchange for dismantling all your heavy industry before it can gain competitiveness (thus giving away the Spanish market to German exporters), can make you double your GDP in a couple of decades?

          Please tell me whether you foresee Germany making any meaningful reform in the next 12 months. If so, tell me why. When I read German newspapers, I can only see German politicians saying Germany is in ever better shape.

          Is that earnestness? The Germans don’t realize if things go under for Europe, they’ll go under for Germany. E.g. Spain manufactures 4 million cars (compared to 8m in Germany), do you think it will be difficult to increase production if wages fall down due to a recession?

          A hint: Audis will start being manufactured next year in Barcelona. With 20% unemployment, there’s plenty of cheap expertise to build premium cars in this country.

        2. bs23

          Considering how poorly things could have gone, the integration of the east has been very successful. However, the experience makes clear that politics is in the driver’s seat, as near-simultaneously opening up labor markets to eastern europe and fixing the DDR currency at 1:1 destroyed what manufacturing base the east had. It may well have been their only option (the DDR citizens, in particular, didn’t want it any other way). But it was a bad one.

          I wouldn’t say the conversation is pointless and lay all the blame on Spain (or piigs by extension, since spanish gov’t debt wasn’t really that high). As I understand it most (half say) German exports were to the EU. So it’s not like Germany didn’t profit from debt-profligacy. Actually, considering that the German gov’t or the ECB could have seen this coming, it does look like the currency union is pointless. What were they expecting to happen, exactly? “Debt-financing is bad! Look at this great deal we’re offering on the B-Klasse!”

          And there is no way one can seriously claim the german media cares more about their export status than the world cup. The constant media coverage degenerated to the level of teenagers incessant worrying/blabbing about their crappy love lives. Will Schweinsteiger’s left little toe be healed in time for the game? (fake example) and so on.

          1. Diego Méndez

            The soccer world cup comparison was an exaggeration, but there is no other country where a word like “Export-Weltmeister” could be proudly used.

            Like the word “Schuld” (guilty – debt), “Export-Weltmeister” points to very deep convictions of how the world should be. Convictions propagated and backed by very concrete economic interests (German exporters).

  13. Rodger Malcolm Mitchell

    Except for the UK, the EU nations are not monetarily sovereign. Not having the unlimited ability to create money, non-monetarily sovereign nations cannot survive on tax receipts alone. They need money coming in from outside.

    Germany has a positive balance of trade, which is its source of outside money. But since then world’s balance of trade = 0, Germany’s positive balance causes some other country’s negative balance. For a monetarily sovereign nation, this is no problem. It simply creates money.

    The PIIGS’s problem is identical to the problems of Illinois, Cook County, Chicago et al. They are not monetarily sovereign. They cannot survive on taxes alone. Taxes merely circulate the money within the nation, while inflation reduces its value.

    The solution for the EU nations, indeed the only solution, is for the EU to supply the needed money, just as the U.S. federal government does.

    Rodger Malcolm Mitchell

    1. NOTaREALmerican

      Re: The solution for the EU nations, indeed the only solution, is for the EU to supply the needed money, just as the U.S. federal government does.

      Which is precisely the problem. The european “states” despise each other more than American states (and regions) do. If the US wasn’t “united” now, there would be no way that the REAL Merican states would send their “hard earned tax money” to (say) CaLiFoRnIa or (say) some other (pansy lie-bral) eastern state; just as those in CaLi wouldn’t bailout Mississippi (unless is was used for holistic peace and justice to aid the oppressed).

  14. e

    From: http://www.examiner.com/x-34155-Albuquerque-Metaphysical-Examiner~y2010m7d11-Astrological-view-of-the-market-in-light-of-the-solar-eclipse-of-71110

    “Looking at the chart of the Euro we see the progressed and directed Sun sextile Jupiter. This is saying that no matter what the difficulties now, the Euro is protected and won’t fail this year.

    The eclipse chart shows the eclipse square the Euro position of Mars, however. This will show up in some erratic activity over the coming months. At the solar eclipse we find the north lunar node coming to cojnunction the Euro Sun. The conjunction is exact on the coming full moon on July 26th. This will very likely have a negative affect on the Euro around that time.”

    – > There U have it. Short term turbulences. “Won’t fall this year.”

    1. NOTaREALmerican

      Thanks for this link. I can finally start investing again.

      “From the long perspective, it is certain that the boom period will happen beginning in 2016.”

      Sounds about right to me, but now I have some science to back it up.

      1. e

        You’re welcome.

        That the source is an American from Arizona proves that there are still interesting American people that can be enjoyed in the world.

        We must not forget them. We must remember them, as they must feel much like it must have felt like living in the Soviet Union, around 1989 or so.

        Yves Smith also comes to mind, in the same breath. A true citizen of this world.

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