How the Greek crisis helped Germany

A few days ago Tyler Cowen did a post discussing the 8.8% RGDP growth rate in Germany in the 2nd quarter.  Because I had previously expressed skepticism about the robustness of the Germany recovery, let me congratulate Tyler for being correct.  Nevertheless, in my never-ending struggle to turn sow’s ears into silk purses, I tried to make the best of it with this essay over at The Economist.  Yes, I was wrong about the recovery (which I still think was less than robust until the second quarter) but the blowout number for German growth shows I was right about something far more important.  I know what you are thinking, “How convenient, he can make up ad hoc theories for his past mistakes.”  Bear with me; this is what I said in May:

“So stocks in the heart of the eurozone, the area with many banks that are highly exposed to Greek and Spanish debts, are actually down a bit less (on average) than the US.  Perhaps the strong dollar is part of the reason.  Perhaps monetary policy has become tighter in the US than Europe.”

Now I certainly did not expect 8.8% growth in Germany, but I did point out that the Greek crisis might have been hurting the US more than Germany.  Recall that it sharply appreciated the US dollar against the euro, and that those gains were closely linked to news stories about the Greek crisis.  So I think it is reasonable to infer that worries about the “PIIGS” led to an increased demand for dollars, which caused the dollar to appreciate.  In principle, the Fed could have prevented this by increasing the supply of dollars, but they are reluctant to do unconventional QE.

I’d also like to mention a few ideas not in The Economist essay.  Let’s start with the slowdown in US growth.  David Beckworth has a post that shows May and June were the key months, when growth in US NGDP began to slow sharply.  But can we really link this to tighter money?  After all, doesn’t monetary policy work with long and variable lags?”   Actually no. 

Monetary policy affects the economy almost immediately.  It is very hard to identify monetary shocks with postwar data, because policy is so endogenous.  But in the interwar period there were some large monetary shocks that were easily identifiable, and in each case they led almost immediately to a sharply change in:

1.  Stock prices

2.  Commodity prices

3.  The WPI

4.  Industrial production

Those who want to argue long and variable lags have a problem.  It isn’t just the empirical evidence I cite, on theoretical grounds the impact on stock and commodity prices must be immediate (unless there are a lot of $100 bills lying around on the ground.)  But the movement in stocks and commodities is closely correlated with broader price indices and monthly industrial production.  So whatever caused the prices of assets to change was also probably driving industrial production. 

And of course we see the same thing in modern times.  The great fall in industrial production in late 2008 occurred at the same time stock and commodity prices were collapsing.  We know the Greek crisis sharply depressed US stock and commodity prices in May 2010.  Now that we get the GDP report, we also know that it depressed NGDP, especially in May and June.  In Germany, the effect was positive, as the weaker euro gave a big boost to the already robust German export machine, which is a big part of the German economy. 

So what can we learn from all this?  Here are some lessons:

1.  Krugman was wrong in suggesting that the slowdown this spring was entirely predictable from the planned phase-out of stimulus.  The slowdown was associated with a sharp drop in stock prices, which was obviously unforecastable.

2.  Krugman was wrong for another reason; the slowdown in the US was not due to less spending, but rather less output growth, as the trade deficit worsened dramatically.  And German output soared with strong exports.

3.  There are no long and variable lags, the economy responds almost immediately to monetary shocks.

4.  Monetary shocks (changes in the supply and demand for dollars) are often much more important than real shocks (banking problems.)  The Greek crisis put the German and French banks under a great deal of stress.  Yet the German economy grew fast, as the weaker euro was like an easing of monetary policy.

5.  I do share one trait with Krugman.  We both have an almost shameless ability to turn failed predictions into claims of “See, I was right all along!” 

[Krugman fans:  Just kidding, he actually does have a pretty good track record at forecasting. But he can be a bit hard to pin down at times.]

Next post:  long and variable LEADS.


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22 Responses to “How the Greek crisis helped Germany”

  1. Gravatar of Ben Atlas Ben Atlas
    30. August 2010 at 12:58

    The phantom growth in Germany is all tool and machinery exports to China (well on its way long before Greece fell apart). Look at the graphs there:
    http://www.spiegel.de/international/world/0,1518,713478,00.html

  2. Gravatar of Morgan Warstler Morgan Warstler
    30. August 2010 at 13:05

    So, the Greeks screwed the Euro, and that increased German exports, instead of…

    The Greeks bent over on austerity measures which made sure there would be no default to the German banks, while Germany has been habitually running a tiny 3% EURO REQUIRED budget deficit for the last 10 years – they have a budget spike of 4.5% – and have austerity measures in place to roll it back uder 3%

    No real mea culpa on your end on the strength of Euro budgeting rules, just, SEE ITS ALL ABOUT THE CURRENCY. So then…. The real effect of QE is that our exports will rise, as our dollar plummets back to $1.50 EUR/USD.

    You never actually answered my question in this regard:

    If there is a single world currency (or multiple currencies can be used basically everywhere), is there any such thing as Macroeconomics?

  3. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2010 at 13:06

    Krugman has blog up calling for the Fed to do something.

    Sumner: Move on to crafting an actual monetary battle plan that Krugman can address. Once Krugman addresses it, it will be on the table, for all of blog-punditry to dissect.

    It will withstand scrutiny, and the Fed will come under pressure to do something.

  4. Gravatar of marcus nunes marcus nunes
    30. August 2010 at 13:48

    You “nailed” it. The others present “excuses”:

    Alberto Alesina
    Credit years of reform, wage moderation, and productivity growth

    Carmen Reinhart
    It’s the lack of leverage

    Harold James
    It comes down to its export orientation

  5. Gravatar of marcus nunes marcus nunes
    30. August 2010 at 13:49

    Cole makes a good point. You have become more than a “gadfly” over the last 18 months.

  6. Gravatar of marcus nunes marcus nunes
    30. August 2010 at 13:56

    Quote of the century:
    “At an annual Federal Reserve retreat, angst, not panic, was the order of the day among officials and economists chastened by a deep recession and a disappointing rebound. “We’ll slog our way through this,” said Thomas Hoenig, president of the Federal Reserve Bank of …

  7. Gravatar of marcus nunes marcus nunes
    30. August 2010 at 14:02

    Full link to above quote:
    http://online.wsj.com/article/SB20001424052748703618504575459680236831538.html

  8. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2010 at 14:34

    Marcus-You bet I do.

    Time to wade into the middle of the battle–indeed, time to define the battle. Yes, there is safety in not explicitly stating what should be done, step-by-step.

    But hey, Scott Sumner has gone this far, he might as well go all in. A man might a get a chance to help his nation and fellow man, on such a large scale, but once in many lifetimes.

    This is Scott Sumner’s hour.

  9. Gravatar of scott sumner scott sumner
    30. August 2010 at 14:37

    Ben, I looked at the graphs and didn’t see any data suggesting the weaker euro could not have played a role. Some of the growth is increased output that Germany plans to export in the future. Production schedules may have been ramped up due to the weaker euro. Did BMW make more cars? Etc.

    I would add that I specifically noted that the euro could not explain all of the 8.8% growth. I put more weight on the stock movements. The German market was hurt less than the US market by Greece, despite their worrisome banking exposure. That tells me much more than the real GDP data.

    Morgan, Should that be directed at Krugman? I’m not the one who favors fiscal stimulus.

    Benjamin, I just may do that. Maybe tomorrow.

    Thanks Marcus

  10. Gravatar of Bogdan Enache Bogdan Enache
    30. August 2010 at 15:30

    How do you explain the high productivity coupled with high unemployement now observed in the US?

  11. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2010 at 15:34

    Scoot:

    Go all in. Just tell us what to do. No regrets, just lay it out.

  12. Gravatar of Morgan Warstler Morgan Warstler
    30. August 2010 at 15:56

    Scott the point is:

    GERMANY has kept to the 3% budget deficit rule. THAT IS WHY they are in a better position now, they FOUGHT the sticky wage problem through the past ten years – and beat back public wages.

    Meanwhile GREECE did not. That is the moral. It isn’t any more complicated than that.

    FAIL: you do not answer my main question:

    If there is a single world currency (or multiple currencies can be used basically everywhere), is there any such thing as Macroeconomics?

  13. Gravatar of scott sumner scott sumner
    30. August 2010 at 16:04

    Bogdan, I’m not sure, since I don’t do research on productivity. Perhaps companies laid of the least productive workers in the recession, and are pressing the others to worker harder least they lose their jobs. Garrett Jones mentioned that many workers produce organizational capital like a good reputation and new ideas. You can keep basic production going with less than your full boom-time workforce.

    These are just guesses.

    Thanks Benjamin.

    Morgan, I know that the German’s did cut wages, and eventually we could as well. But there are quicker solutions. As long as there are different exchange rates, individual currencies matter.

  14. Gravatar of Richard W Richard W
    30. August 2010 at 16:08

    Considering they export so many capital goods the orders would have been placed well before Q2 2010. The euro appreciated vis-a-vis the USD from Feb 2009 to Nov 2009 1.25 to 1.50. It then depreciated with a large plunge during the first three weeks of May until hitting a low of 1.19 at the beginning of June 2010.

    The Ifo German business climate index shows that business confidence was growing throughout 2009 even though the euro was appreciating. There was a large jump in confidence during the Feb/March period when the euro was depreciating and then it was flat during April and May until increasing in June.
    http://www.bloomberg.com/apps/quote?ticker=GRIFPBUS:IND

    It seems unlikely that the Greek crisis and the depreciating euro explains German Q2 when most of the orders would have been submitted when the euro was appreciating. Moreover, the Greek crisis appears to have left German business confidence flat for two months of Q2. Maybe they were ramping up production in Q2 for export orders from a weaker euro but it was a six month depreciation rather than something that just happened in Q2.

  15. Gravatar of Morgan Warstler Morgan Warstler
    30. August 2010 at 16:42

    So, we have a “science” that only exists as long as your government owns the printing press of its people.

    And SUDDENLY that very temporal thing, the “print” button IS THE KEY to understanding economics.

    Exactly how likely is that really Scott? How can you LOOK AT EUROPE as anything other than a lesson in REMOVING the printing press?

    And why doesn’t supply/demand stop being real?

    How can you pretend there aren’t far more basic structural things that determine economic success, than how much money gets printed, and how much people expect will be printed?

  16. Gravatar of spencer spencer
    31. August 2010 at 12:50

    I agree with Ben Atlas in the first comment. The differences between the US and Germany are structural and have little to do with the different short run policies in the Great Recession. Germany exports and the US imports. In the second quarter of 2010 US final domestic demand rose at a 4.9% rate, or some $16T2.6 billion ( 2005 $). But imports jumped some $142.2 billion ( 2005 $). Thus some 87.5% of the surge in demand was filled by imports rather than domestic production.

    With these kind of old fashion Keynesian leakages it is no wonder the US economy is doing so poorly. It is a direct result of the policies implemented since Reagan of the US borrowing abroad to finance increased consumption and living beyond our means. Yes, the second quarter was extreme, but it still reflected the structural changes imposed on the US economy since the early 1980′s.

  17. Gravatar of StatsGuy StatsGuy
    31. August 2010 at 13:38

    ssumner – I don’t think you have to worry about being accused of making up this stuff post facto. A large faction was arguing that Germany was using Greece to talk down the Euro from 1.60 to the dollar, where it was killing exports, without having to rely on ECB action.

    In other words, Germany’s export prosperity was purely beggar-thy-neighbor, and was purchased at the expense of Greece (and, more sadly, Ireland and Spain).

  18. Gravatar of scott sumner scott sumner
    1. September 2010 at 05:30

    Richard, I agree about the 6 months depreciation, but the most intense occurred in Q2.

    And I am obviously arguing for the “ramping up production” theory, I do understand that there is a long lag in capital goods orders.

    Morgan, You said;

    “How can you LOOK AT EUROPE as anything other than a lesson in REMOVING the printing press?”

    Does Europe have hyperinflation?

    Spencer, You said;

    “I agree with Ben Atlas in the first comment. The differences between the US and Germany are structural and have little to do with the different short run policies in the Great Recession. Germany exports and the US imports. In the second quarter of 2010 US final domestic demand rose at a 4.9% rate, or some $16T2.6 billion ( 2005 $). But imports jumped some $142.2 billion ( 2005 $). Thus some 87.5% of the surge in demand was filled by imports rather than domestic production.”

    Sounds like you agree with me. I said the strong dollar is the problem. Is a big trade deficit what you’d expect from a strong dollar (resulting from dollar hoarding?)

    Statsguy, The view you describe is certainty not mine. Germany seems to support a strong euro, and oppose easier money by the ECB. And I certainly don’t believe in beggar-thy-neighbor theories, I have consistently criticized that idea in my blog. I think Adam Smith said no county has been ruined by trade.

    A weak euro actually helps Greece.

  19. Gravatar of spencer spencer
    1. September 2010 at 05:57

    The dollar is the symptoms, not the cause. The cause is the domestic savings-investment gap.

  20. Gravatar of Scott Sumner Scott Sumner
    1. September 2010 at 10:59

    Spencer, That gap suddenly got much worse in the first few days of May?

  21. Gravatar of Morgan Warstler Morgan Warstler
    1. September 2010 at 22:04

    Sumner,

    that’s enough. all of Europe has been constrained to 3% budget deficits for ten years. They took public employee wage stickiness and bitch-slapped it. Isn’t it grand? isn’t it PROOF your life should have greater meaning?

    What the hell do you think Mundell was really doing? what was his real mission? here’s a hint: real heavy-weight economists convince multiple first world governments to stop having their own currency. right after they invent Reaganomics and right before they advise China how to keep us from screwing the savings of their peasants.

    I have high hopes for you Scott, but you need to learn when to pull out your lever, and read from your script… like Greenspan.

    So, now that you fully grant Europe is a testament to taking away the printing press….

    Seriously, how can we talk about Germany without talking about the magnificent currency change that suddenly made Europe more conservative than the US.

    After all, didn’t the whole continent just kind of RENOUNCE macroeconomics?

  22. Gravatar of ssumner ssumner
    2. September 2010 at 10:36

    Morgan, Maybe, but arguably it was the open market for goods and labor which disciplined its members. I don’t see Britain Sweden and Denmark as being less efficient than the others, despite the large transfer programs in those countries. And they aren’t in the euro. Estonia and latvia have their own currency (Although Estonia is adopting the euro) and they did the sort of internal devaluation that must be a dream come true for you–slashing wages of public employees.

    And you could argue that the euro led to bad behavior in Greece and the other PIIGS, as they free-rode on German conservatism which produced low interest rates.

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