Sunday, May 13, 2012

German exports and euro crisis

Germany plan for Europe is to replicate its own model during last decade. A FT article ("German miracleous machine", by FT correspondent in Brussels, Ralph Atkins) argues that
  • the country has become “a model for Europe . . . The lesson learnt from Spain, Italy, Portugal – not to mention Greece – is that sustainable growth comes only if the economy is flexible enough”.
Well, this is not feasible under present conditions and Germany would not have succeeded his "structural reform" if those reforms were implemented under the actual inflation and growth conditions in the euro zone. IIGPS countries are now in trouble within a very troubled environment. Not like the EU boom period of German restructuring.
Krugman and a lot of others have mentioned it. And "structural reform" in Germany has conveniently avoided opening the retail sector and to reform its services sector - and to restructure the weakness of its banking sector. Another recent article in WSJ (Germany to Euro Zone: Do as We Say, Not as We Do) makes a balanced analysis of the situation, and comments:
  • There is a further aspect of the German response that some economists find difficult to accept: the implicit requirement for Germany to do nothing. They say it's arithmetically impossible for every economy in the world to build growth on the German model of export success; and if every country in the euro zone is to do it, they need to find others willing to run big deficits in the rest of the world.
Yesterday, BBC World showed a nice and balanced documentary about Greece crisis, by Michael Portillo, the british politician well known as an eurosceptic. He made his point riding a new Porsche around Athens streets, in order to stress how much Germany exports (to Greece and eurozone as well) during boom years have profited from Greece (and others) boom years induced by a euro thought to be as safe as a sovereign currency as the american dollar.

We have already seen as Spanish house boom and bust was largely financed by German banks. Exports have been an important part of the story. So, lets have a look at Germany exports.
Let's begin with its value and structure, from 1991 to 2010, last two decades. We have aggregated exports from Germany to four destinations: IIGPS (Italy, Ireland, Greece, Portugal, Spain, the peripheral economies under stress), euro zone behind IIGPS, EU common market behind euro zone, and rest of the world (RoW):

Data shows the "ubber competitivity" (Krugman) of German export machine after internal reunification crisis in Germany has begun to be sorted out, around 2003. Michael Portillo correctly stressed in his documentary that German reunification has been a much more expensive bailout than Greece one, and it has been fully supported by the euro countries - some of them now under strong and disastrous duress policies leaded by Germany.
Data also shows the impact of 2008/9 crisis, really immediately  followed by a recovery. Recovery that Germans and european neoliberals claim to be due to the right reforms performed in german economy during last decade, reforms that provided the flexibility needed to its economy. May be they are (at least, partially) right - but it does not solve anything of the present euro crisis, that is also largely associated with an imperfect and uncompleted, badly designed and flawed financial union with a common currency.

The structure of german exports shows that IIGPS markets bought around 15% of German worldwide exports during last decade. Other non IIGPS eurozone countries contributed close to 30% and remaining European Union (non euro) countries contributed around 20%. Overall, EU was close to 2/3 of German exports (64% in 1999, 63% in 2008) and RoW the remaining share, a bit more than 1/3 (36% in 1999, 37% in 2008).
What about growth per destination? Rebasing data to 1999=100 (reunification year), differences between eurozone and non eurozone appear only clear after 2006 and they are not so dramatic:

From 199 to 2009 German exports grew at 13.2% cagr: only 12% for IIGPS, but 14.5% for EU non euro countries (but only 13.9% for RofW). In nominal values, IIGPS contributed with 12% of German exports growth from 1999 to 2009, against 26% for other euro countries, 23% for EU non euro countries and 39% for RoW countries.
Let's have a look at the detail of IIGPS data: Portugal, Ireland and Greece are in the 1% or less range. But Spain is 4 to 5%, and Italy 6 to 7%:

Considering growth from 1999 to 2009, Greece and Spain had a 13% cagr (compounded annual growth rate), Ireland 14% and Portugal only 9%. In general, a very respectable two digit growth over a decade, not far from overall Germany cagr in the same period.

IIGPS countries represent a significant share of German exports and its growth during last decade. Any multinational would be very cautious to discard around 15% of its sales in a very near shore zone. And German net trade numbers with eurozone would be different if growth of german exports to IIGPS countries is discarded, only from 1999 to 2009 (but keeping their 1999 level):

Even the picture with global worldwide exports would be less rosy, although still impressive:

Stiglitz has argued about the instability of the international trade system in his presentation to last INET Conference (Berlin, 13 April 2012, video here), entitled "Is mercantilism doomed to fail?", claiming that international trade implies that some countries have deficits and others surplus - if some countries have big trade deficits (like IIGPS countries), this implies others should have large surplus (like Germany), and both have shared liabilities:
  • In a global general equilibrium, if some country pursues policies that persistently lead to net exports, then there must be some other country (countries) that have net imports
  • if one country takes action to limit its trade deficit, if surplus countries persist in their surpluses, some other country must face an increased trade deficit
  • Surplus countries lower global aggregate demand and impose costs on all other countries and on systemic stability of the system
  • Whatever the validity of justification, in pursuing their own interests, surplus countries impose
    costs on others
  • Global instability is as much (or more) a result of the behaviour of surplus countries as of deficit countries
This same idea is well captured in the WSJ article:
  • "If the others become more like Germany, at the same time Germany needs to become more like the others."
(Data: OECD Stat.Extracts, International Trade, harmonised system from 1988)

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