Thursday, October 31, 2013

Treasury Report on Germany's Trade Surplus Is Incomprehensible

The big headlines about the U.S. Treasury, and hence the Obama administration, criticizing Germany's export-led trade policy seemed outlandish.  So, as I always do, I try to get to the source and see for myself.  The source is the innocuously titled report. "Semiannual Report on International Economic and Exchange Rate Policies." 

Most of the facts recitation, charts and discussion are unsurprising because they've already been discussed ad nauseam in lots of print and discussion sources.  The stage is set by this factual recitation.  The euro area current account was close to balance in 2009-2011, and it increased to a surplus of  2.3% of GDP in the first half of 2013.

The report also notes, "On a real effective basis, the euro appreciated by 2.7 percent in the first
half of 2013 and by a further 0.6 percent in the third quarter of 2013."  Keep this in mind.The report continues,
  "The euro area economy expanded by 1.2 percent, on a seasonally adjusted, annualized basis (saar), in the second quarter of 2013, marking the first expansion of economic activity in the euro area in seven quarters. Expansion was supported by domestic demand growth in Germany - though growth in Germany still continues to rely on positive net exports, which continues to delay the euro area’s external adjustment process – and on domestic demand in France."
This is an incomprehensible logical leap, so let's back up to the facts that may, or may not support this. The German current account surplus in the first half of 2013 was a bit more than 7% of GDP.  The Netherlands ran a current account surplus during the same period in excess of 10% of GDP.  So, if Germany were somehow able to run a domestic demand constraining, export-led policy in the face of a rising euro, then what were the Netherlands doing?  The answer is that the contention is economic humbug.  

Later in the report we read,"Germany’s current account surplus, meanwhile, rose above 7 percent of GDP in the first half of 2013, with net exports still accounting for a significant portion (one-third) of total growth in the second quarter, suggesting that rebalancing is not yet occurring domestically."  Wait.  This means two-thirds of the total growth in the second quarter was accounted for by sectors other than net exports.  How can the Treasury's political conclusion laying the burden for the eurozone's adjustment process at the feet of German trade performance be justified?  

The performance came despite the fact that the currency movement was unfavorable.  I would call it good performance.  On the other hand, the report doesn't offer the detailed trade statistics among countries or regions to delve into the problem further, but the growth of the Chinese economy and the push for 'infrastructure investment' alluded to in the report was probably a source of Germany's strength in net exports.  

In fact, the discussion about China seems to raise more questions about their continuing management of their economy, despite the strong nominal increase in the renminbi during the period.  China continues to build foreign reserves and there is no sense of their economy rebalancing  towards domestic consumption.  China, however, gets a free pass in the reports discussion of international adjustments.  

The German reaction to the political nature of the Treasury's report was strong, as reported in the Wall Street Journal.   "The German export growth story is mainly in emerging markets like China, the implicit criticism that Germany should export less and consume more—there I have my doubts because [European] periphery economies don't have products Germans would consume,' Mr. Brzeski said."

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