On Net-exports Life Support: Germany Is Back at It, and Now Euroland Is Too

Germany’s Federal Statistical Office released its first estimate of German GDP in 2012 at a press conference held in Wiesbaden yesterday: “German economy withstands the European economic crisis in 2012.” Reporting that growth slowed markedly in Germany last year, down to only 0.7 percent from 3 percent in 2011 and 4.2 percent in 2010, the international media seemed to pin the slump (the Office’s estimate assumes a contraction in GDP of 0.5 percent in the final quarter) on the euro crisis (FT.com:  “Germany hit by debt crisis turbulence”; WSJ.com: “Euro crisis damps German growth”).

It is rather unsurprising that German exports have not been doing so well in the crisis-stricken countries of the euro area of late. Germany’s trade and current account surpluses with its euro partners have declined significantly. But so far the crisis has actually been a mixed blessing overall. For one thing, benefiting from its haven status, Germany’s interest rates and financing costs are extremely favorable. While lending support to property markets, finance minister Wolfgang Schäuble enjoyed a nice windfall too, as Germany’s general government budget ended the year with a small surplus, in part owing to savings on debt interest payments (much in contrast to his partners elsewhere in the area).

But that is far from all. For the euro crisis has also nicely kept the euro’s exchange rate in check. The euro may perhaps be somewhat too high from the perspective of the euro crisis countries, but it is way undervalued from the viewpoint of German competitiveness; which pinpoints the intra-area imbalance behind the ongoing crisis. As a result, as if U.S. and Chinese stimulus programs were not enough, German extra-euro area exports have been in overdrive since the global crisis; nicely offsetting the turbulences wreaking havoc in the region. While much of Germany’s external imbalance is still concentrated in Europe today, its share in Germany’s overall external imbalance is down sharply, especially for Euroland. The point is that Germany runs trade and current account surpluses with almost every major country and region in the world. For instance, Germany’s bilateral trade balance with the United States reached a surplus in the 40 billion euro ballpark last year, well ahead of its pre-crisis peak. Germany also runs very sizeable surpluses vis-à-vis OPEC and developing and emerging market economies at large. Believe it or not, Germany now even runs a current account surplus vis-à-vis China, featuring roughly balanced trade in goods of late!

The idea that the euro crisis may have finally caught up with Germany therefore needs to be qualified by emphasizing that German GDP growth in 2012 actually derived from a positive growth contribution of net exports of 1.1 percentage points. This massive external growth stimulus more than offset the negative 0.3 growth contribution of domestic demand. Interestingly, this outcome may be seen as a reminder of the 2001-5 period, when Germany was famously dubbed “the sick man of the euro.”  For during that period too Germany was flying on one engine only: net exports. Thanks to its rising external imbalance—which provided the underlying cause of the still unresolved euro crisis—Germany still saw its GDP grow, albeit at a meager rate, despite negative growth contributions from domestic demand.

So how can Euroland successfully rebalance and overcome its crisis when even Germany is now reentering a situation of shrinking domestic demand? Well, Bundesbank president Jens Weidmann may have provided the answer in a speech titled “Rebalancing Europe” delivered in London in March last year. Weidmann hinted there that while rebalancing Europe might see the European portion in Germany’s external imbalance shrink, the same does not have to apply for the remainder—the very part which is actually surging now. In fact, owing to its ongoing Germanization, the same is true today for Euroland as a whole as well. As Eurostat reported yesterday, the area’s external surplus is sharply on the rise. Net exports thereby partly offset the decline in GDP due to plunging domestic demand. Germany is back at it—and now Euroland as a whole is too.

One thing is for sure: the German authorities will continue preaching the gospel that price stability, austerity, and structural reform are good for growth and well-being, no matter what dimension the collateral damages insanely inflicted across Europe in this holy war might still reach. As an über-competitive Germany brought crisis to Europe, beware what a Europe striving for über-competitiveness under German command might do to the world.

See http://www.levyinstitute.org/pubs/wp_721.pdf and http://www.levyinstitute.org/pubs/wp_738.pdf