A few weeks ago, I reported on the excellent article of Marcel de Boer from the Dutch financial newspaper Het Financieele Dagblad (www.fd.nl) on the growing cumulative imbalances in Europe. He pointed to the fact that the PIIGS-countries can’t solve their debt problems before there comes an equilibrium in the trade and capital balance of all the European countries:
Under the lead of the social-democrat German chancellor Gerhard Schröder, the consumer was made subordinate to the German trade and industry. Quickly, consumption lagged with production, according to Pettis. The surplus in goods and services was sold abroad, almost exclusively in Europe and especially in the part now called “the peripheral countries”:
Portugal, Spain, Italy and . Greece
Normally, it doesn’t take long before a country with a trade surplus sees its currency increase in value. However, as the Euro was deployed, this was not possible. Within the Euro-zone,
Germany had an undervalued currency, while the countries that imported ’s export suffered from an overvalued currency. Germany
Implicitely, this was like a tax charge on German imports, according to Pettis. A charge, that acted like a subsidy for the German industry. In the peripheral countries, the industry was ‘taxed’ to subsidize imports. In a short matter of time,
Germany could turn its lagging competitiveness into a lead: in 2000 had a small deficit on the trade balance, but in 2007 it was the largest exporter in the world. In the meantime there had been no significant growth of imports, rather to the contrary. Germany
As a consequence of the common currency, a situation evolved within the Euro-zone that could be compared with the relation between the
US and Greece: as a consequence of underconsumption in China, together with the coupling of the yuan to the dollar, overconsumption evolved in the . US
As this whole article was an absolute must-read, an almost integral translation can be found at the aforementioned link.
How topical this article still is, becomes clear today. A representative of the Dutch parliament, Sybrand Haersma Buma (member of christ-democrat party CDA), pleaded on the Dutch Business News Radio station BNR (www.bnr.nl) for a European Budget Authority (‘EBA’). This EBA could automatically penalize countries that are infringing the European budget rules as laid down in the Stability Pact (Part of the Maastricht Treaty). These budget rules state a.o. that the budget deficit might not be larger than 3% of the total budget.
Now, this penalizing is a political process that takes a majority decision from the Euro-zone countries. This makes such a decision subject to some heavy horse-trading. You might remember that the first countries to infringe the Stability Pact were…
France and , not coincidentially the strongest and most influential Euro-zone members. Germany
Although some politicians (a.o. former Dutch Finance Minister Gerrit Zalm) lobbied aggressively for it, both countries were (of course) never penalized for breaking the rules of the Stability Pact. And Gerrit Zalm? He could forget a further political future within the EU. And the peripheral euro countries (hence: the PIIGS)? They learnt a valuable lesson in those days.
Of course, a European Budget Authority (EBA) could help to maintain a more vigilant approach to balancing the budgets of the individual Euro-zone members. But: there won’t be such an authority and even if this authority would be set-up, it would be a toothless tiger.
France, Germany and The Netherlands are forced to, they will also infringe the Maastricht budget rules, like France and did before. And the penalty?! The EBA would be advised to stick it ‘at a dark place’. This means that instating an EBA would be like pulling on a dead horse. Germany
And the million dollar question remains: what is the point of penalizing countries that are already in deep financial trouble. It is like pushing a drowning person deeper in the water in order to punish him for his irresponsible behavior.
Besides that, it totally misses the point that was gloriously made by Marcel de Boer of the FD: not the budget deficits in itself are the biggest danger for the Euro-zone, but the trade and capital imbalances between the Euro-zone countries.
To make my point, I will show some charts on one of the biggest net exporters in the Euro-zone: The Netherlands. All data is (of course) courtesy of the Dutch Central Bureau for Statistics (www.cbs.nl).
The first chart shows the trade imbalances between The Netherlands and the PIIGS-countries for 2011, Year-to-Date:
Trade imbalances between The
click to enlarge
Italy, Portugal and importing (more than) twice as much from The Netherlands than they export to The Netherlands. Spain
importing even five times as much from The Netherlands than it exports to the country. Greece
The second chart shows the trade imbalances between The Netherlands and its main European trading partners (except for
that is mentioned above), that belong to the strongest countries in the Euro-zone for 2011, Year-to-Date: Italy
|Trade imbalances between The Netherlands and its main trading partners;|
all data courtesy of www.cbs.nl
click to enlarge
Although the differences are not so large as in the earlier chart, also with these countries The Netherlands is a huge net exporter. Especially
imports almost twice as much as it exports to The Netherlands and also the other mentioned countries show considerable imbalances. And remember: although the differences are smaller in this chart, the amounts are much higher here. France
As Marcel de Boer pointed out correctly: surplusses on the trade balance go hand-in-hand with deficits on the capital balance; it’s a zero sum game.
To finance the Dutch exports to all these countries, the Dutch government and capital institutions must lend enormous amounts of money to their customers. Just like the Germans and Chinese do to fuel their exports. Again Marcel de Boer:
Against these surplusses, there are equally large deficits on the capital account. Eventually, the external account must be balanced. An outflow of money from
evolved and the flow led to the peripheral countries. Countries that were used to interest rates of 15% or more, before the euro was introduced. And suddenly these countries received almost ‘free’ money, not in the least, because the ECB kept its borrowing rates too low in order to further support the German economy. Germany
The peripherals should have used the cheap money to reinforce the structure of their economies. They received this advice from the ECB month after month, but ignored it. The money was mainly used for consumption and when it was invested, it was spent in the housing market, that was blown up to a bubble of massive proportions.
Translating this quote to the Dutch situation: The
Netherlands not only lends money to the peripheral countries (‘the PIIGS’), but to any country it has an export surplus with, including Germany, France and the . These trading and capital imbalances and this intertwinedness of the capital flow in the Euro-zone are in my opinion a much larger risk for the probability of survival of the Euro(-zone) than the budget deficits. UK
And although a total equilibrium between imports and exports in the Euro-zone is an illusion, in my opinion it could be a very good idea to instate a ‘Stability Pact on Trade and Capital’ that penalizes countries that export too much within the Euro-zone (or even EU).
The current ‘smartest boys in the class’ The Netherlands,
France and would then suddenly become the ‘school’s brats’. Such an approach might help to prevent the current building up of imbalances that is such a risk for the stability within the Euro-zone. Germany
Now the politicians in the perpetrating countries (Germany, France, The Netherlands) point their finger at the countries that could be considered their ‘victims’ (The PIIGS) and put the total blame for the problems in the Euro-zone on their shoulders. That is half-right and therefore totally wrong.