Germany doesn’t benefit from a weak euro

The past week it’s been open season on Germany.  Even I have occasionally bashed them for their views on monetary policy.  In a way this is odd, because in many respects Germany has been (since 1945) almost like a model country.  Other countries should try to be more like Germany.  It’s also odd because Germany’s views are completely typical of the eurozone–so why single out that one country?  Yes, France and Italy are a bit more moderate, but the other 15 are just as upset with Greece as is Germany.

Ben Bernanke recently made some comments on Germany and the eurozone:

Since the global financial crisis, economic outcomes in the euro zone have been deeply disappointing. The failure of European economic policy has two, closely related, aspects: (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone. The poor overall performance is illustrated by Figure 1 below, which shows the euro area unemployment rate since 2007, with the U.S. unemployment rate shown for comparison. . . .

In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today the unemployment rate in the United States is 5.3 percent, while the unemployment rate in the euro zone is more than 11 percent. . . .

The slow recovery from the crisis of the euro zone as a whole is the result, among other factors, of (1) political resistance that delayed by many years the implementation of sufficiently aggressive monetary policies by the European Central Bank; (2) excessively tight fiscal policies, especially in countries like Germany that have some amount of “fiscal space” and thus no immediate need to tighten their belts; and (3) delays in taking the necessary steps, analogous to the banking “stress tests” in the United States in the spring of 2009, to restore confidence in the banking system.

So far this is very similar to my views, except the part about fiscal policy.  But here’s where Bernanke loses me:

What about the strength of the German economy (and a few others) relative to the rest of the euro zone, as illustrated by Figure 2? As I discussed in an earlier post, Germany has benefited from having a currency, the euro, with an international value that is significantly weaker than a hypothetical German-only currency would be. Germany’s membership in the euro area has thus proved a major boost to German exports, relative to what they would be with an independent currency.

I see this argument a lot, but it makes no sense on either theoretical or empirical grounds.  Over at Econlog I have a post showing that northern European countries not in the euro have just as big current account surpluses as Germany.  And by the way, even on theoretical grounds joining the euro should not matter at all, if Europe had previously had a fixed exchange rate system.  So I’ll give Bernanke the benefit of the doubt and assume that it’s the fixed exchange rate regime that he thinks actually benefits Germany, not the euro itself.  Let’s also put aside the question of why Bernanke thinks a current account surplus “benefits” a country—that’s not standard economics.  Indeed by that logic Australia would be suffering from its large chronic CA deficits.  The CA surplus is simply domestic saving minus domestic investment; it’s not clear why we should care about it.

There is one way to test Bernanke’s claim.  A country with an undervalued currency will see its real exchange rate appreciate through inflation.  Recall that in the long run monetary policy only affects the nominal exchange rate, the real exchange rate is determined by the fundamentals driving saving and investment.

The counterargument is that prices are sticky, and hence it may take a while for the real exchange rate to reach equilibrium.  Yes, but even so, if this were occurring then you’d see high inflation in Germany during the adjustment process.  Here’s the actual inflation rate in Germany:

Screen Shot 2015-07-18 at 12.41.08 PM

It seems to me that Bernanke’s claim might apply to the early 1990s.  At that time Germany was booming, partly due to the rebuilding involved with re-unification, and the ERM tied Germany to weaker economies like Britain and Sweden.  At that time, the DM was undervalued, and instead of a rise in the nominal exchange rate (prevented by the ERM), inflation rose sharply higher, raising the real exchange rate.

Today German inflation is merely 0.3%, not what you’d expect if the euro were undervalued in Germany.  Indeed I see little evidence of an undervalued currency in Germany since 1995.  Let’s review:

1.  Bernanke’s claim is not consistent with mainstream macro theory, at least in the long run.

2.  Bernanke’s claim is not consistent with the fact that other northern European countries that still have their own currencies also have huge CA surpluses.  Why wouldn’t a Germany with the DM be like Sweden and Switzerland? (I leave out Norway, whose CA surplus may be bolstered by oil.)

3.  And Bernanke’s claim is not consistent with the very low and falling inflation rate in Germany.  If the euro were undervalued in Germany, inflation would be high and rising.


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61 Responses to “Germany doesn’t benefit from a weak euro”

  1. Gravatar of Blue Eyes Blue Eyes
    18. July 2015 at 10:39

    I read somewhere that Germany’s current account surplus is 7.5% of GDP. The Germans are operating a mercantilist, deflation-exporting policy. Maybe German wages are not able to respond as normal.

  2. Gravatar of ssumner ssumner
    18. July 2015 at 11:02

    Blue, Nope, check my Econlog post.

  3. Gravatar of Blue Eyes Blue Eyes
    18. July 2015 at 11:10

    Sorry, that doesn’t make much sense.

    Maybe the Euro is the right currency for Germany, but few others.

    It is possible that Germany made the right internal reforms to thrive in the Euro. They are still mercantilists.

  4. Gravatar of Blue Eyes Blue Eyes
    18. July 2015 at 11:11

    Sorry, third comment: my reference to not making sense referred to my first comment, not to yours.

  5. Gravatar of ssumner ssumner
    18. July 2015 at 12:07

    Blue, You have not presented a shred of evidence that they are “mercantilists.”

    And if the euro is “right for Germany” (which it may be at the moment), that means it doesn’t benefit from an undervalued currency.

  6. Gravatar of Jerry Brown Jerry Brown
    18. July 2015 at 13:00

    Scott, I agree that Germany has been a model country since 1945. For one thing, they produce more than they consume, which lets others consume more right? That is usually a good thing I would think. But right now within the Eurozone, Germany is a creditor and they have been pushing policy the way any creditor would want it pushed- toward very low inflation and deflation in countries like Greece and Ireland and Spain. The ECB itself has an inflation target of close to 2%. I could be wrong, but it is my understanding that Germany (and some of the other northern countries) has been very reluctant to implement policies that would allow the ECB to hit that target. So Blue Eyes kind of has a point about Germany acting as mercantilists.

  7. Gravatar of Jerry Brown Jerry Brown
    18. July 2015 at 13:09

    I like to think about what would happen if Europe asked Scott Sumner to be the ECB chairman knowing he would announce 4.5% NGDP level targeting. Can you imagine Schauble’s reaction?

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. July 2015 at 14:45

    Scott,
    Implicit in all this discussion about Germany is the erroneous belief that German exports have soared since before the recession.

    Actually German exports of goods and services only rose by 17.5% in nominal terms between 2008 and 2014 according to AMECO. This is less than the supposedly export addled UK (18.8%), as well as less than the US (23.7%), Australia (26.4%), Korea (30.4%) and Poland (50.5%).

    Countries with large current account surpluses like Germany often display poor nominal export growth. For example, among the countries you mentioned in your other post, between 2008 and 2014 nominal exports of goods and services have only risen by 19.8% in Switzerland, by 17.5% in the Netherlands, by 6.2% in Denmark, by 3.3% in Sweden and are essentially unchanged in Norway.

  9. Gravatar of JL JL
    18. July 2015 at 15:40

    Whereas academics and bloggers such as Krugman, Sumner and Varoufakis are free to speak truth as they see it, I think Bernanke is trying to leverage his reputation in a careful manner to steer euro policy a nudge in the right direction.

    That involves embracing the less harmful myths that ‘everyone knows’ if they can be useful to steer the debate in the right direction.

    I think the idea that Germany benefits from the euro is one of the few beneficial myths in this bizarro world we live in.

    If Bernanke manages to steer euro policy in the right direction even a little, then he will have helped resolve the third big recession in this century.

    Scott, on this note I can heartily recommend Steve Randy Walkmans latest article to you. On loving Germany, Greece and Finland. I think its the kind of utilitarian thinking you could appreciate.

  10. Gravatar of ssumner ssumner
    18. July 2015 at 15:50

    Jerry, For Europe I might pick 3.5% NGDPLT (with some short term catchup first), but yes, there would be outrage.

    Your longer argument seemed fine, except the term “mercantilist” doesn’t really apply to it. Inflation hawk is more descriptive, as it’s not about trade.

    Mark, Thanks for that data–very interesting.

    JL. Thanks for the tip. I tend to think that the truth is likely to lead to the best outcomes, and that the world is too complex to figure out which sort of white lies might improve things. I also believe that Bernanke believes what he writes.

  11. Gravatar of Mike Sax Mike Sax
    18. July 2015 at 18:12

    Ok, in this vein I’ll ask you about one more quote, from Greg Mankiw:

    “In an earlier era, Greece could have devalued the drachma, making its exports more competitive on world markets. Easy monetary policy would have offset some of the pain from tight fiscal policy. Mr. Friedman and Mr. Feldstein were right: The euro has turned into an economic liability that has exacerbated political tensions. For this, the European elites who pushed for the currency union bear some responsibility.”

    http://www.nytimes.com/2015/07/19/business/history-echoes-through-greek-debt-crisis.html?abt=0002&abg=1

    Just interested in your thoughts.

  12. Gravatar of TallDave TallDave
    18. July 2015 at 19:59

    A country with an undervalued currency will see its real exchange rate appreciate through inflation.

    But they’re in a currency union with weaker partners, if the price differences get larger shouldn’t they be subject to increasing arbitrage?

    Any region is going to have winners and losers for a given policy over a given period of time. Germany is a winner, Greece is a loser. In the US, I’d guess the fracking states have been winners through 2015, but that may reverse if prices fall enough, but of course Americans tend to move to their jobs anyway.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. July 2015 at 20:08

    TallDave,
    Actually given the mass movements of working age populations in or out of Ireland, Latvia and Spain over the last decade, labor mobility is very low on my list of problems that the eurozone is facing.

    True the gross migration rate by EU-27 members into eurozone member states averaged only 4.40 (per 1000) during 2002-2011 in contrast to the gross state-to-state migration rate of 20.48 in the US over the same period. But there is foreign migration to compensate and, more importantly, the proper measure for migration as a labor market adjustment mechanism is *net migration*. When these two factors are taken into account, the net migration rate (the weighted average of the absolute values) over 2002-2011 are 4.06 and 4.90 for the eurozone and the US respectively. And when one re-averages the eurozone over the 63 NUTS 1 regions, to make the divisions in population more similar, the net migration rate rises to 4.35.

    So by this measure population migration in the eurozone is almost the same as in the US. Moreover gross migration rates of working age adults suggest that the net migration rate of working age adults in the eurozone relative to the US may be higher still.

    Of course it wasn’t always this way. According to Ivo Maes (1992) the net migration rate in 1980-85 (prior to the Schengen Agreement) in the EC and the US was about 2 and 7 respectively.

  14. Gravatar of Ray Lopez Ray Lopez
    18. July 2015 at 20:11

    Sumner picks a straw man (Bernanke) and demolishes him. No big deal. However Sumner fails to mention the other errors and omissions by Bernanke (aside from the elephant in the room that I don’t expect Sumner to acknowledge, namely, monetary policy is neutral): there is little freedom of people movement between member countries in the EU, due to language barriers, compared to the monolingual USA; the EU depends more on bank financing than the USA; the EU has more old people per capita than the USA; and, last but not least, it’s just chance that the EU is trailing the USA at the moment (economics is nonlinear and like that).

  15. Gravatar of Ray Lopez Ray Lopez
    18. July 2015 at 20:15

    @Mark A. Sadowski – your adjusted stats are not taking into consideration that there’s little or no migration between the PIGS and the non-PIGS. It doesn’t count to say that there’s free flow of people between the prosperous countries of the EU. Anybody who has actually lived in Europe as opposed to seeing pixels on a computer monitor knows this. TallDave is right.

  16. Gravatar of TallDave TallDave
    18. July 2015 at 20:39

    Mark,

    I agree Europe has bigger problems, but probably the best way to answer that question is to look at the variance of unemployment across members, and the tendency to move from high to low.

    Even though European mobility tends to be higher between like ethnicities, I suspect Americans move to their jobs more mainly of the less onerous labor regulation.

  17. Gravatar of TallDave TallDave
    18. July 2015 at 21:04

    You have to wonder how hard it is to move from Greece to Germany.

    http://www.statista.com/statistics/268830/unemployment-rate-in-eu-countries/

    Weirdly, Greece actually has more population growth than Germany.

    https://en.wikipedia.org/wiki/List_of_countries_by_population_growth_rate
    https://en.wikipedia.org/wiki/List_of_U.S._states_by_unemployment_rate
    https://en.wikipedia.org/wiki/List_of_U.S._states_by_population_growth_rate

    Of course I should really calculate average unemployment rates over a period and then derive a coefficient of willingness to move based on difference in employment, but the people of Kyrat really need my help tonight.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. July 2015 at 22:38

    Ray Lopez,
    Net migration from Italy, Spain and Portugal to the UK was 115,000 in 2013. Net migration from Italy, Spain and Greece to Germany was 77,000 in 2013. In general about 20% of net migration into non-GIIPS countries in recent years has been from GIIPS countries. Just like in the US, people gradually migrate to where the jobs are.

    I have spent time in Europe. My parents are European. All my cousins are European. My brother is European. I’m the only US citizen in my family.

  19. Gravatar of Matt Moore Matt Moore
    18. July 2015 at 23:34

    By the same token, you must think that an overvalued currency hasn’t harmed the PIGS countries then?

  20. Gravatar of Postkey Postkey
    19. July 2015 at 00:33

    @Ray Lopez

    ” . . . monetary policy is neutral): . . . ”

    “Credit and growth
    Werner (1992, 1997, 2005, 2011b), using Japanese data, shows that credit for GDP transactions explains nominal GDP well over several decades, while alternative explanatory variables (including interest rates and money supply) are eliminated in a reduction from a general to the parsimonious specific model.” P23.

    http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

  21. Gravatar of Ray Lopez Ray Lopez
    19. July 2015 at 01:21

    @Mark A. Sadowski who says: “In general about 20% of net migration into non-GIIPS countries in recent years has been from GIIPS countries. Just like in the US, people gradually migrate to where the jobs are.” but this proves my point, not yours. If 20% of the net migration is from PIIGS to non-PIIGS, then 80% is from non-PIIGS to non-PIIGS (I doubt anybody is migrating from a non-PIIG to PIIG country for work). Hence, you need to adjust your ‘weighted averages’ you mentioned in your first post to account for this “20% only” factor, and if you do so, common sense says the EU will be found to be less mobile than the USA. TallDave is still right. BTW, glad to see you’re a fellow European. Thanks for any bailout monies you sent to my country, Greece (snicker, snicker). I have a Greek cousin who got rich from EU-grants and loans for ‘solar farms’, he simply converted his low-yield corn and hay fields to solar power farms, and paid off his loan in 2 years (kept the grant money, as he fraudulently pretended he was poor) and now makes $100k euro per farm (and he has several). He had to bribe a geologist to show that his plot of land was best suited to capture the sun (not true, it was not the only candidate) but that’s a small aside.

    @Postkey – Thanks, I am aware of Werner, who is a favorite economist of mine, from one of your previous posts. As you may know, Werner coined the term “QE”. Nothing however that Werner says shows the Fed has influence over the economy, though I believe from reading Werner’s papers he is a monetarist and drinks the Kool-Aid.

  22. Gravatar of Rajat Rajat
    19. July 2015 at 01:43

    This is not Bernanke’s point but what about the idea that although German inflation post 2008 has not been high, assuming other EZ countries have experienced deflation, Germany has experienced a real appreciation relative to France, Italy, Spain, Greece, etc. To the extent that German exports are substitutable for exports from those other countries, and taking external demand for all European goods as given, the Euro may have led to higher German exports and growth than if all EZ countries had separate currencies but the USD/DM exchange rate was the same as it has implicitly been under the Euro. I suppose this is an anti-‘beggar-thy-neighbour’ rationale for the Euro.

  23. Gravatar of Rajat Rajat
    19. July 2015 at 01:52

    In other words, the Euro combined with the ECB’s policies have led to a German real exchange rate that is about fair value but real exchange rates for other EZ countries that are too high. What those other countries have lost in ex-EZ exports, Germany has gained. It’s like California has imposed a high minimum wage across the rest of the US, allowing its exports to gain at the expense of other US states.

  24. Gravatar of Postkey Postkey
    19. July 2015 at 02:19

    Ray

    Is providing corroborating econometric evidence for his ‘paradigm’ drinking ‘the Kool-Aid’?

  25. Gravatar of ssumner ssumner
    19. July 2015 at 04:22

    Mike, I totally agree with Mankiw.

    Mark, Nice slap down of Ray.

    Ray, I know nothing about Werner, but if you say he’s a monetarist, I’m going to assume he’s almost certainly an anti-monetarist.

    Rajat, In that case Germany would have about the same real exchange rate as under a DM, but the PIIGS would have a higher real exchange rate under the euro. The euro wouldn’t be helping Germany, but it would be hurting the PIIGS. BTW, I checked and France has essentially the same inflation rate as Germany:

    http://www.tradingeconomics.com/france/inflation-cpi

    I see your second comment is similar to mine. But it’s not a zero sum game. The exports lost by the PIIGS are gained by no one.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. July 2015 at 05:42

    Ray Lopez,
    “If 20% of the net migration is from PIIGS to non-PIIGS, then 80% is from non-PIIGS to non-PIIGS (I doubt anybody is migrating from a non-PIIG to PIIG country for work).”

    About a quarter of EU net migration into non-GIIPS countries is from outside the EU, so net migration from GIIPS countries is actually a roughly proportional amount of the net migration from EU countries into non-GIIPS countries.

    Furthermore the net migration from outside of the EU alone into Italy was 183,000 in 2012, which is only slightly less than it averaged in the years prior to the recession. So evidently some people are still finding it desirable to move to GIIPS countries.

    “Hence, you need to adjust your ‘weighted averages’ you mentioned in your first post to account for this “20% only” factor, and if you do so, common sense says the EU will be found to be less mobile than the USA.”

    First you denied that there was any net migration taking place at all between GIIPS countries and non-GIIPS countries. Now you admit such migration is taking place, but argue that one needs to “account” for it by….not counting it?!?

  27. Gravatar of Ray Lopez Ray Lopez
    19. July 2015 at 07:31

    @Mark A. Sadowski – sorry, you have the data, I don’t. I am not going to do your homework. I’m merely suggesting, based on what you said, that the relevant metric for intra-EU mobility is how many people move from PIIGS to non-PIIGS countries. Anyway, the relevant metric is gross migration, not net, as gross migration shows the willingness of people to move. (“True the gross migration rate by EU-27 members into eurozone member states averaged only 4.40 (per 1000) during 2002-2011 in contrast to the gross state-to-state migration rate of 20.48 in the US over the same period.”).

    Why is gross migration preferable to net? Because with net migration you are starting from a low base, then adjusting it, to come up with something “similar” in the USA, which is NUTS (apples and oranges). Simple example: suppose in one year two states in the USA experience the following migration: 10000001 people left California for Nevada, and 10000000 people left Nevada for California, leaving a net migration of -1 for CA and +1 for NV, even though 10 million people crossed the CA-NV border. Now in Europe, ten people left Denmark for Germany in the same year, and nine people left Germany for Denmark, giving the same +1, -1 annual figures (“net”). Which region is more dynamic for mobility? Common sense says it’s the USA. Common sense, something you seem to lack, with your middle-aged head Photoshopped on a young persons cap-and-gown. Did you really graduate with a PhD or did you buy your diploma from a mill in Granada?

  28. Gravatar of collin collin
    19. July 2015 at 07:48

    My guess this low of Euro is not good for Germany just like a really high Euro is not good either. At this point small movements in currency don’t drive their manufacturing although I do wonder if a China might effect them. The most important thing Germany has done is integrate their economy between East and West which hurt their growth in 2000ish (there were a lot costs) and helped today economy (more labor supply).

    If I were to say what Germany needs to improve the Euro is to better integrate their economies with the other European nations and increase worker flexibility. And isn’t that one key ingredients of a currency union?

  29. Gravatar of Jean Jean
    19. July 2015 at 08:07

    Why is everyone so angry with Germany? Because they were warned that the euro, so constructed, with “Tier Two” money ring fenced, couldn’t ever function.
    Because they forced the Irish taxpayer to pay the unsecured bonds of the banks.
    Because the first “rescue” of Greece was actually a rescue of French and German banks which increased Greece’s debt burden – the American members of the IMF told them in 2010 that what they were doing would make it impossible for Greece to recover.
    A certain large German bank was leveraged out 55 to 1 in Sept. 2008 – where the hell were the bank regulators?

  30. Gravatar of Ray Lopez Ray Lopez
    19. July 2015 at 08:22

    @sumner, @Postkey – I’m pretty sure Werner is a monetarist, though he might disagree with that label. Werner: “However, the fact that banks create the money supply can be utilized to answer our research question at hand: In an economy with a banking system, the amount of money actually used for transactions can only increase when banks create new credit (Werner, 1992, 1997). *This means that bank credit creation should have a direct impact on transaction volumes, demand, and hence also prices, as Mill (1848) and Bentham (1952-4) suggested.* ” from – ‘Towards a New Research Programme on ‘Banking and the Economy’ -Implications of the Quantity Theory of Credit for the Prevention and Resolution of Banking and Debt Crises’ by Richard A. Werner (2011) * emphasis added

  31. Gravatar of Bubble Monger Bubble Monger
    19. July 2015 at 09:02

    – Of course, european economic growth was “weak”. In Southern Europe we saw interest rats rise in 2009, 2010 & 2011. Rising rates are NOT good for “Economic growth”. And that weighs on the entire eurozone. As a result of rising rates Southern Europe was forced to cut back on spending (“austerity”).
    – Germany has surpressed Household/consumer/worker income growth since 2001 while at the same time passing out benefits to the corporate sector. That’s has boosted german exports but the german domestic economy remained weak.
    – Combined with weak demand from Southern europe it’s no wonder “growth” has been “weak”.

    – Unemployment is defined differently on both sides of the Atlantic Ocean.
    – US growth is overstated because here in the US we underestimate (PRICE) inflation.

    – Countries with a CA Surplus have – in general & in normal circumstances – lower interest rates than countries with a CA Deficit. That’s the benefit of having a CA Surplus.

    – “The CA surplus is simply domestic saving minus domestic investment”. Wrong. A CA balance is the difference between consumption and production. And that balance could be a Surplus or a Deficit.
    – Countries with a CA Deficit, like Australia, the US, the UK therefore “suffer” under higher interest rates. Because the CA Deficit is the amount of money that country needs to borrow from foreigners.

  32. Gravatar of TallDave TallDave
    19. July 2015 at 09:19

    BTW, I checked and France has essentially the same inflation rate as Germany: http://www.tradingeconomics.com/france/inflation-cpi

    Again, I don’t see how intra-currency-union prices could vary by much without opening up arbitrage opportunities that would quickly level the difference.

    The German mark would surely be stronger than the Greek drachma right now, if they were separate currencies. While of course it is possible the Greek CB and the German CB would pursue exactly the same policies as the ECB, it seems very likely Greece would be pursuing looser money.

    I agree with the Scott that Germans don’t really benefit from ECB policy, but they are less harmed than the periphery.

  33. Gravatar of ssumner ssumner
    19. July 2015 at 09:38

    Jean, Yes, the bank bailouts were a mistake.

    Ray, Love how you quote Werner making a non-monetarist statement.

    Bubble, You said:

    “The CA surplus is simply domestic saving minus domestic investment”. Wrong. A CA balance is the difference between consumption and production. And that balance could be a Surplus or a Deficit.
    – Countries with a CA Deficit, like Australia, the US, the UK therefore “suffer” under higher interest rates. Because the CA Deficit is the amount of money that country needs to borrow from foreigners.”

    This is all completely wrong. The US produces more than we consume, just like Germany. US consumption is only about 70% of GDP. And a CA deficit does not necessarily represent borrowing, that’s a common mistake that even economists often make.

    Talldave, Your last sentence nails it.

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. July 2015 at 10:19

    Ray Lopez,
    “…giving the same +1, -1 annual figures (“net”). Which region is more dynamic for mobility? Common sense says it’s the USA.”

    Wrong again.

    Common sense says that the labor supply has changed by the same amount in each of your scenarios. That’s why economists who study how the level of labor mobility affects asymmetric shocks in the context of optimum currency area theory (OCA) focus on net migration, not gross migration.

    Now go to the back of the class and put your dunce cap on.

  35. Gravatar of dw dw
    19. July 2015 at 12:12

    well if Germany doesnt get any benefit from the ‘weak’ euro who is? cause it doesnt appear that any of the southern European countries do.

    which does make you wonder why they wanted to be in it in the first place.

    supposedly Greece was only allowed in because they were the last non euro nation that was in Nato. course thats not really true since Turkey isnt in it.

  36. Gravatar of HW HW
    19. July 2015 at 14:00

    I think given their larger share of global nominal GDP than Sweden or Switzerland it should be harder for them to achieve comparable CA surpluses as a % of GDP. Generally speaking, the larger the economy compared to the rest of the world, the smaller the total trade/GDP ratio and the CA surplus as a % of GDP will be (one reason why trade makes up less of the US economy than most countries). Yet there are no countries the economic size of Germany that have close to its CA surplus as a % of GDP, only countries who make up substantially less of global GDP, according to the WEO Database.

  37. Gravatar of Bubble Monger Bubble Monger
    19. July 2015 at 14:09

    @Ssumner:

    “The US produces more than we consume, just like Germany.”

    On what planet have you been living in the past 25 years ? Because the last year the US ran a CA Surpluss was in 1990 !!

    The US is running CA Deficit of USD ~ 450 billion. Whereas Germany is running CA Surplus. Even our own CIA is saying that.

    https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html

    https://www.dropbox.com/s/bfghsx6gpk7asjy/080113-chart01.jpg?dl=0

    The US is also running a Trade Deficit. I.e. the value of the exports is lower than the value of the imports. In other words, the US is living beyond its means. Subsidized by the rest of the world. Buying e.g. T-bonds.

    If you don’t like that then I can recommend the socalled IMF recipe to decrease those deficits:
    – Increase taxation (10%, 20%, 30%)
    – Cut federal spending (10%, 20%, 30% or more)
    – Decrease or get rid of entitlements, pensions, Medicare, Medicaid, Social Security.
    But that would mean Civil War here in the US. From 2001 up to 2012 Southern Europe was also running CA Deficits and now thery’re all running CA Surplusses. Remember the riots in Greece ?

  38. Gravatar of Bubble Monger Bubble Monger
    19. July 2015 at 14:30

    The US Trade Deficit:

    https://www.dropbox.com/s/854f1q7rzc71ass/TradeDeficitAug2014.PNG?dl=0

  39. Gravatar of Ray Lopez Ray Lopez
    19. July 2015 at 15:14

    @sumner – care to explain why a bank creating credit that moves the economy (‘high powered money’, ‘multiplier effect’ to jog your memory) is not monetarist? You assume only open market operations are monetarist? Dumb.

    @Sadowski – you think that 10M people crossing a border is the same as ten people crossing the border in terms of showing which economy is more dynamic in job opportunities? Because apparently your textbook says the ‘net’ labor supply is the same? You really that stupid? Wow. Dumb and dumber.

  40. Gravatar of Don Geddis Don Geddis
    20. July 2015 at 08:31

    @Ray: “care to explain why…

    Perhaps you could start, with just a simple definition of the term “monetarist”? Can I ask what you think that term means?

    Hint: if you don’t know, you might be able to Google it.

    Dumb. … You really that stupid? … Dumb and dumber.

    Your rhetoric is indeed highly persuasive.

  41. Gravatar of Jim Glass Jim Glass
    20. July 2015 at 08:59

    @Ssumner:

    “The US produces more than we consume, just like Germany. US consumption is only about 70% of GDP. “

    @Bubble Monger

    On what planet have you been living in the past 25 years ? Because the last year the US ran a CA Surpluss was in 1990 !! The US is running CA Deficit of USD ~ 450 billion…

    “US consumption is only about 70% of GDP.”

    True or False?

  42. Gravatar of DF DF
    20. July 2015 at 09:28

    Scott,

    Germany’s RER has actually decreased over the past decade because of lower inflation:

    http://data.worldbank.org/indicator/PX.REX.REER/countries/DE-FR-IT-ES?display=graph&cid=DEC_SS_WBGDataEmail_EXT

    Does that mean that Germany has been overvalued? I wonder what has been the driver, VAT taxes?

  43. Gravatar of Jerry Brown Jerry Brown
    20. July 2015 at 14:15

    @Jim Glass: “U.S. consumption is only about 70% of GDP. True or False?”
    That question is difficult because it is both true and false depending on the context you are using it in. In the context of bubble monger’s argument the better answer is False.

    While it is true that in the formula GDP=C+I+G+(X-M), C is about 70% of GDP, C does not represent total “U.S. consumption”. C represents only the total of private household final consumption expenditure. That is different than the argument that I think bubbles is making, which is along the lines that C+I+G+imports is a more accurate description of total U.S. consumption, and since that total is larger than C+I+G+exports, then the U.S. is actually consuming more of the worlds goods and services than it is producing.

  44. Gravatar of Don Geddis Don Geddis
    20. July 2015 at 16:25

    @Jerry Brown: I get what you’re saying, but calling Investment a part of Consumption is starting to slip into territory where words just don’t mean anything any more.

  45. Gravatar of Jon Jon
    20. July 2015 at 16:49

    Wow. I never took much time to read Ray before. Scared.

    Bubble, the trade deficit has something to do with

    1) foreigners wanting to live here
    2) we have twice as much market cap in our stock markets than we have GDP–foreigners want to hold their money here

    #1 also explains Southern Europe and the converse explains why cold Northern Europe is the opposite. Yes old Germans like to move to Spain and Greece.

    Countries where this rule doesn’t apply usually have capital controls that make it difficult for foreigners to own property.

  46. Gravatar of Jerry Brown Jerry Brown
    20. July 2015 at 17:10

    @Don Geddis: “calling Investment a part of Consumption is starting to slip into territory where words just don’t mean anything any more”. I totally agree, especially when you use the capitol C and I when describing consumption and investment in terms of GDP. Actually, I think my idea was that consumption the way bubbles was talking about was different from consumption the way it would be used when saying it was only 70% of GDP. But I have thoroughly confused myself by this point.

  47. Gravatar of Bubble Monger Bubble Monger
    21. July 2015 at 03:39

    @Jim Glass:
    If the US wasn’t running a CA Deficit then US consumption would ve been at a 50, 55 or 60%, not 70%.

    @Jon:
    No. The trade deficit is simply that the value of US export is smaller than the value of US exports.

  48. Gravatar of Orn Gudmundsson, Jr. Orn Gudmundsson, Jr.
    21. July 2015 at 05:03

    Scott raised a very good question and I think TallDave nailed it pretty well. Let’s not ask ourselves about overall inflation (that matters in a fixed or controlled currency regime vs a floating one, e.g., Yuan vs USD) but, rather, where we might see differences within a currency block. That is, what commodities don’t move across borders as well as others? Labor and real estate is where you would see it most. I wouldn’t expect broad inflation in more mobile goods because prices adjust too easily. Also, comparing Germany, southern countries and northern non-Euro participants doesn’t make sense, there isn’t an equivalent southern example you can use as a contrast, not that an n of one would be that useful anyway.

    Wages in Germany have gone up (http://www.tradingeconomics.com/germany/wages), and, where they matter most (i.e., manufacturing). Manufacturing is important because that is the least mobile of EU jobs. Executives, engineers, bankers, they can live a more cosmopolitan existence and do. Temporary unskilled labor (e.g., construction workers from eastern countries during the Irish housing boom) move as well, but skilled manufacturing labor sticks closer to cultural and language roots. Labor mobility is one of the biggest inherent problems in the Euro experiment.

    Also, real estate. Germany has a high percentage of renters and rents vs fellow Euro participants and rents have diverged significantly:

    https://research.stlouisfed.org/fred2/series/CP0410DEM086NEST

    http://ec.europa.eu/eurostat/statistics-explained/index.php/Housing_price_statistics_-_house_price_index

    I agree Germany is not a net beneficiary, and I also think current accounts as not particularly important, but, inflation, especially relative to other Euro partners, is there in the less mobile goods.

  49. Gravatar of Jim Glass Jim Glass
    21. July 2015 at 06:45

    @Bubble Monger

    @Jim Glass: If the US wasn’t running a CA Deficit then US consumption would ve been at a 50, 55 or 60%, not 70%.

    OK, that’s one way of admitting, “True, the USA produces a lot more than it consumes”. Good, a start.

    Now consider that another way of saying “trade deficit” is “capital surplus” — and a capital surplus is good, no?

    E.g., for decades during the late 19th C and into the 20th the USA ran continuous massive annual trade deficits/capital surpluses to finance turning itself from a backwards agricultural society into the industrial powerhouse of the world. Pretty good, eh?

    Never argue from a balance of trade position, certainly not by assuming “deficit is bad”. That’s what Mercantilists do. Mercantilism is bad.

    The correct analysis is “it depends…” looking at a lot of things together. Perspective.

    “Nothing, however, can be more absurd than this whole doctrine of the balance of trade.”
    – Adam Smith, Wealth of Nations

  50. Gravatar of TheMoneyIllusion » Germany doesn’t benefit from a weak euro « Economics Info TheMoneyIllusion » Germany doesn’t benefit from a weak euro « Economics Info
    21. July 2015 at 13:00

    […] Source […]

  51. Gravatar of ssumner ssumner
    21. July 2015 at 16:18

    dw. The euro is not weak, it is quite strong in the only way that matters; NGDP growth and inflation.

    HW, You are mixing up several concepts. Trade as a share of GDP has no bearing on the question. The reason large countries often have smaller imbalances is that they are quite diverse, with high and low saving regions. Germany is not diverse, it’s northern European from Munich all the way up to Hamburg.

    Bubble, See Jim. You are also wrong about CA deficits being net borrowing, it isn’t

    Ray, Are endogenous money people monetarists?

    DF, The euro was overvalued for Germany in 2005, when they had more than 11% unemployment.

  52. Gravatar of Major.Freedom Major.Freedom
    21. July 2015 at 16:49

    “And Bernanke’s claim is not consistent with the very low and falling inflation rate in Germany. If the euro were undervalued in Germany, inflation would be high and rising.”

    This is reasoning from a price change.

    The currency exchange rate and the domestic inflation rate are not always proportional (inversely or positively depending on the currency being a numerator or denominator).

    If Germany’s productivity is higher, then even an undervalued Euro in Germany won’t have “high” domestic prices.

  53. Gravatar of Ray Lopez Ray Lopez
    22. July 2015 at 17:27

    ssumner: “Ray, Are endogenous money people monetarists? ”

    You’re asking ME? Professor you should be TELLING me. But here’s your answer, and the answer seems to be “yes and no”: http://monetaryreflections.blogspot.com/2013/07/endogenous-monetarism.html

    The crux of Nick Edmonds’ argument seems to be that credit creation can be non-money creation, non-bank money, like an extension of credit on a credit card, if that makes sense (it does not make sense to me but it might to you, skilled in esoteric and obscure arguments). You’re welcome.

  54. Gravatar of Bubble Monger Bubble Monger
    23. July 2015 at 07:15

    @Jim Glass:
    No. It’s a way of saying the US consumes more than it produces. And the financing of the difference between consumption & production has to come from somewhere. Either from foreigners or from increasing debt.

    See Greece. It ran a CA deficit as well from 2001 up to 2010. But then foreigners refused to roll over their loans to Greece and interest rates went through the roof. The same is in store for us here in the US.

  55. Gravatar of Jim Glass Jim Glass
    23. July 2015 at 11:33

    @Bubble Monger

    @Jim Glass: No. It’s a way of saying the US consumes more than it produces. And the financing of the difference between consumption & production…

    Friend, the strategy of ignoring what I (and all) say to simply repeat over and over something that is false will never make it true. E.g. for 2013:

    USA Gross Domestic Product: $17.4 trillion

    USA Final Consumption* $14.0 trillion. (*Private + Govt + NonProf)

    Gross Domestic Production in excess of Final Consumption = $3.4 trillion.

    Exporting less than you import is *not* the same as consuming more than you produce — a concept that is pretty simple to grasp.

    What matters is *not* your fixation on Production – Consumption, but rather Savings – Investment, which must equal Exports – Imports, with the causation possibly going either way or both.

    As I suggested to you before, say “trade deficit = capital surplus”.

    If foreigners bring more funds into your nation to invest than they take out, because your nation has the best investment opportunities, safest securities, strongest rule of law, most secure political situation, etc., all of which is very *good* for you, then your Investment will exceed Savings and you will have a capital surplus – and a trade deficit will be forced upon you by the laws of arithmetic.

    It is a strange fact of human cognition that so many people who immediately see that trade flows can drive investment flows are totally oblivious to the fact that investment flows can equally drive trade flows. (“Why would a capital surplus cause a trade deficit?”) One more reason why to “never argue from a balance of trade position” — you have to look at a whole bunch of things to get a sense of what is driving what, for good or ill.

    But a useful shortcut to remember is “Mercantalism is bad”.

    See Greece … The same is in store for us here in the US.

    See the USA. Do you *really* think that the USA by running continual large trade deficits through the post-Civil War era into the early 20thC thus impoverished and ruined itself? Or do you think that it industrialized from a backwater agricultural nation into a world productive powerhouse with the financing from those capital surpluses? Choose one.

    After which, if you still can’t get this right and want to fight over it, take it outdoors with Adam Smith.
    ~~~

    Another comment of mine on this with links to data seems to have repeatedly gone into some spam trap. If this produces a series of dupes, apologies in advance,

  56. Gravatar of Bubble Monger Bubble Monger
    24. July 2015 at 05:15

    “Friend, the strategy of ignoring what I (and all) say to simply repeat over and over something that is false will never make it true.”

    I agree. But then you need to get the facts right and not “create your own reality”.

    No. GDP is not production. It’s expenses, spending. People need to spend first and then production follows.

    We, US consumers spend A LOT OF of money on stuff made in the US (domestic production). But we also import oil and that’s “produced” abroad. Hence the Trade Deficit.

  57. Gravatar of Jim Glass Jim Glass
    24. July 2015 at 08:55

    “GDP is not production. It’s expenses, spending.”

    Gross Domestic Product isn’t product, it’s expenses. Dude, please. :-)

    Consumption is spending. That’s why they have different words and numbers for “production” and “consumption”.

    Look, here are numbers for 2014 from Fred documenting just how the country is being sold off via the trade deficit…

    100 — GDP
    85 — Total consumption (private, govt, non-profit)
    15 — Domestic savings for investment
    18 — Actual investment
    3 — Capital account surplus/trade deficit, the difference of 18-15

    Do those numbers just scare you to death? Foreigners bringing money here *to invest* like that!!

    The trade deficit is NOT consumption-production, it is Investment-Savings.

    If you own a business and decide to get financing by borrowing from a bank or selling equity in it to someone else, are you in the process of making yourself *poorer*? The correct answer is: “don’t know, insufficient information”. But it certainly doesn’t make any difference if the other person is from abroad.

    Now maybe you have a clue as to how the US ran all those ‘expenses’ from its massive trade deficits post-Civil War into becoming the world’s industrial powerhouse. Andrew Carnegie became the world’s richest man by building the US steel industry by “going into debt” to British bankers at 5% and investing at 15%. Think of all that factory equipment he bought from the British with his borrowing, running up the trade deficit higher and higher! *If only* he’d been a farmer, who kept what little money he had here in the USA … right?

    BTW, another fact you should learn is that the USA collects *net income* on its international investment position, in spite of “owing more than it owns” in international investments.

    This is because foreigners invest heavily in T-Bills and other safety-first US investments for 2%, while US investors invest abroad in operating businesses to get 7%.

    So net return $$$ money flows to the USA from abroad — and the gap in our favor is widening!

    https://research.stlouisfed.org/fred2/graph/?graph_id=247734

    My gosh, how long can we keep *this* up?

    In the reality the actual world lives in.

  58. Gravatar of Brandon Brandon
    23. September 2016 at 05:32

    @ssumner Thanks for the post, a couple questions:

    1.) I understand that we expect the surplus would drive inflation up, and inflation isn’t going up. But, it’s a fact that Germany is running a current account surplus. Is this not beneficial to Germany? Also, doesn’t an artificially weak euro increase exports, subsequently creating jobs which otherwise would not exist?
    2.) You say “Let’s also put aside the question of why Bernanke thinks a current account surplus “benefits” a country—that’s not standard economics.” Is it not intuitive that a country couldn’t run a current account deficit forever?

  59. Gravatar of Scott Sumner Scott Sumner
    23. September 2016 at 06:21

    Brandon, Actually, there is no reason to expect a surplus to drive inflation up.

    There’s no reason to presume a surplus is better than a deficit. Some countries are better off running surpluses, others are better off running deficits.

    I don’t know what you mean by “artificially” weak euro. What is the equilibrium value, and how do you know it? Why is eurozone unemployment above 10%?

    A country may be able to run a CA deficit forever. Australia’s done so for a very long time, and there is no indication it couldn’t keep doing so for many thousands of years.

  60. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    5. December 2016 at 15:18

    Sumner-sensei

    If ECB announced significantly higher NGDP path than expected, Euro(currency) will be weak? (vs USD or Japanese yen etc)

    I know Japanese example of Abenomics, however, Euro-zone have very big GDP gap. I can’t imagine what will come.

  61. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    5. December 2016 at 15:27

    I have a plan to investment on euro-zone companies,
    I wonder currency hedge is needed or not needed.

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