I’ve mentioned repeatedly that Germany wants contradictory things: it wants to stop financing its trade partners (the periphery countries in Europe) and yet wants to continue to run large trade surpluses. I took this to be a sign of German wishful thinking, or just politicians figuring the incoherent strategy can still be maintained for the duration of their time in office.
A post by Yanis Varoufakis show that the Germans at least have better delusions that I realized. Their plan for how to square the circle is to shift from exporting to the periphery and sell more to the rest of the world.
That sounds lovely in concept but is rather disengaged from the state of play. The US is the importer of last resort. The deficit cutting plans underway are intended to reduce consumption, which should lower our trade deficit. On top of that, some manufacturers have been “reshoring” operations, in part because Chinese wage increases (due to a combination of increases in standards of living plus a moderately high level of inflation) have made operating in China less attractive than it used to be.
And that’s before you get to the Japanese brute-forcing the yen from over 80 to a more viable 100 yen to the dollar. While the sweet spot for the Japanese before was below 110 yen to the dollar, better yet below 115 to the dollar, the difference between the US and Japanese inflation rates makes up most of the difference between 115 yen to the dollar in 2007 and 100 to the dollar now. I had thought the Japanese would be pressured to stop their depreciation. Kuroda, the governor of the Bank of Japan, said earlier this week that the Japanese were not seeking to trash the currency. This ranks with the Japanese claim in the 1980s that they should not be asked to import US beef because Japanese colons were different and they couldn’t handle foreign beef. The BoJ chief also stated that the measures already taken were sufficient for the moment. The US officially scolded the Japanese late Friday. From the Wall Street Journal:
The Obama administration used new and pointed language to warn Japan not to hold down the value of its currency to gain a competitive advantage in world markets, as the new government in Tokyo pursues aggressive policies aimed at recharging growth.
In its semiannual report on global exchange rates, the U.S. Treasury on Friday also criticized China for resuming “large-scale” market interventions to hold down the value of its currency, calling it a troubling development. The U.S. stopped short of naming China a currency manipulator, avoiding a designation that could disrupt relations between the world powers.
I no longer have great contacts in Japan, but given that Japan is still a military protectorate of the US and that tensions are rising over the islands the Japanese call Senkaku, I’d find it hard to imagine that the BoJ did not give the Fed advance warning. In fact, it’s not implausible to imagine that Japan has been wanting to intervene for some time but has been urged not to by the US. The yen rising to the moon was the direct result of Chinese buying, effectively shifting their currency manipulation from dollar to yen (the Chinese buy yen, the Japanese are the ones who have to buy dollars to keep the yen from going even higher relative to the dollar. You can see the results in the rise in Japanese dollar FX reserves in recent years). And the US finger-waving, in advance of the G-20, may be perceived to be necessary to appease China, which has been regularly hectored in the past for its dirty peg.
As Yanis Varoufakis tells us, the German fantasy of finding new export markets to conquer wasn’t working so well before the Abe shock; it’s an even more uphill battle now.
By Yanis Varoufakis, Professor of Economics at the University of Athens. Cross posted from his blog
here is a growing consensus among commentators that Germany is de-coupling from France and from the rest of the Eurozone’s deficit regions. That German industry is turning instead to Asia and the rest of the world (even to Britain) for sources of demand for its net exports. However, the data suggests otherwise. Germany remains perfectly dependent on the Eurozone’s deficit member-states for the purposes of financing its net trade deficit with key non-Eurozone countries.
In 2012, mostly on account of energy imports, Germany had a net trade deficit of €27 billion with Russia, Libya, and Norway. In addition, it sported a €4.7 billion trade deficit vis-à-vis Japan and a sizeable €11.7 billion trade deficit with China. In total, Germany’s trade deficit with these net exporters summed to €43.4 billion. Meanwhile, Germany’s trade surplus with the Eurozone’s deficit nations (France, Italy, Spain, Greece, Portugal, Cyprus and Ireland) came to a still staggering €54.6 billion – despite the sharp diminution of this number following the sharp decline in imports in these crisis-hit nations.
Put differently, Germany’s net exports to the countries that the German press likes to lambast as ‘laggards’ that constitute a drain on German ‘progress’, sufficed to pay for Germany’s net trade deficit vis-à-vis China, Japan, Norway, Russia and Libya, with €11.2 billion to spare: enough to cover for the €3.4 billion transferred to German factories in the Czech Republic and in Slovakia and a large chunk of German companies’ transfer payments to their Dutch partners or subsidiaries (which are in a surplus of more than €15 billion with their German partners).
In short, despite all rumours to the contrary, German global trade surpluses are still being financed by the deficits of the imploding Eurozone ‘stragglers’. It is in this sense that Germany’s denial of the systemic nature of the Eurozone crisis, and its leaders’ commitment to the principle of ‘the greatest austerity for the weakest Eurozone member-states’, is perhaps our epoch’s most spectacular own-goal.