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Economy in Brief

German Exports Rebound and German Trade Strains EMU
by Robert Brusca  May 10, 2016

The German trade surplus has moved sharply higher in March (on data back to 1996, the surplus never before been this large). Exports are up by 1.9% in the month and steadily accelerating to an 11.7% rate of growth over three months (SAAR). The U.S. has recently taken steps to warn some of its trade partners of foreign exchange manipulation and Germany was on the list of five countries that the U.S. singled out. While known as having one of the strongest economies in the world, the German economy is now pushing ahead with even stronger exports and weak imports.

In yesterday's report, we showed that foreign export orders were strong while German domestic industrial orders were weak. In the trade report today, we find information that underlines the extent to which Germany is running neo-mercantilistic policy by ramping up exports that feed off of scarce foreign demand while constraining its own demand at home particularly with its austere fiscal budget plan. As the most fiscally sound country in Europe, Germany is also running the tightest fiscal policy on the continent at a time that there is a demand shortage in the global economy.

Exports are from Mars; Imports are from Venus

German imports plunged by 2.3% in March and are lower by 2.5% year-over-year. Imports are falling on all horizons from 12-month to six-month to three-month. Capital goods imports are up by just 3.9% over 12 months and are falling over three months. Consumer goods imports are falling at a 6.7% pace over three months.

Near record export to import ratio

The ratio of exports to imports is extremely high. It was last higher in May 2004. Since 1996, that ratio has only been higher on only three other occasions. Germany is clearly using the international trade situation for its own advantage to an extent unseen since at least German reunification. By locking the DM at a fixed exchange rate in the EMU matrix and keeping its competitiveness as the best in class as other EMU nations have faltered, this has put downward pressure on the EMU exchange rate and enhanced German competitiveness which has been boosted tremendously by the weak euro exchange rate. Germany SHOULD be taking special extra steps to dismantle its huge surplus in the face of such competitiveness gains, instead it is clamping down on government spending - making the surplus larger.

Not working

This system is no longer part of a well-functioning economic process. Instead, just like Greece, with a debt problem, and Spain, with an unemployment problem, Germany has a huge surplus problem - add it to the growing list of EMU members with `problems.' It's just that Germany's problem does not debilitate Germany. Germany exports the ill consequences of its problem.

Disequilibrium is the new normal?

These things which we can call `disequilibria,' are clear manifestations of economic processes that are not working. Economics is about a lot of things. But one of those things is about how systems operate. The global trading system has been malfunctioning. Some countries have amassed huge foreign exchange reserves while running huge trade and current account surpluses. These joint actions are responsible for blunting the economic adjustment mechanism under `free trade.' When a country like Germany or China runs a large current account surplus and builds up foreign exchange reserves, the reserve build up is a retention of the foreign currency which prolongs the strength of that currency and promotes weakness in the domestic currency extending the period of current account surplus and of the disequilibrium. If markets are free (as in free trade and free from government manipulation), market forces would bring about automatically the relevant adjusting processes.

Is anyone paying attention?

We can see evidence of all sorts of these disequilibria around the world and in the EMU. If markets are not going to automatically clear, then the authorities need to take action to see that they do. Maybe the action they need to take is less action- less interference. Instead, government actions have largely been the reasons for the emergence and the exacerbation of these disequilibrating events.

Germany has a one-sided view of the rules

It is not clear to me how the Germans can justify their continued enforcement of austerity in the EMU when they themselves violate rules about having chronic payments surpluses. Germany is making life harder for fellow EMU members. This is not about Germany being a good citizen while others are bad. There is ample evidence of bad EMU citizenship all around, and as we have seen with the migrant crisis, deep divisions in how to deal with problems when they arises.

Modus Operandi in EMU

The EMU has simply adopted a way of operating that does not make sense. Rules seem to be followed on a pick-and-choose basis. While Europeans claim that the EMU is special and about more than economics, it is said to be about being European. Yet, it is clear that FEW really want to be `European.' There are Germans, French and Italians etc. and very few Europeans. Countries have their own nationalistic goals and cultures which they want to defend more than they want to unite Europe. This isn't wrong; it is simply true. Until recently, Schengen was the sacred cow that all in Europe supported above all else. But with the problems it has introduced in conjunction with the migrant influx, that sacred cow is now being slaughtered. It is no longer clear what the glue is that holds Europe together. Is it Crazy Glue T or just plain crazy?

Does Europe stand for something or will it stand for anything?

For sure this brings us back to the single currency more than anything else that defines the euro area. But it is no longer clear that there are enough supporting reasons for this economic arrangement to trump all others. In the midst of the financial crisis, we were told that the EMU is much more than just a currency area. If so, what is that? And when will we find out what true common ground Europeans have instead of seeing every country trying to press a different interpretation of the rules onto everyone else? That does not strike me as the act of an area united in a fundamental way. One again I am reminded of the Meat Loaf song. "I will do anything for love.but I won't do that." That about sums it up for Europe.

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