Monday, 12 December 2011

The German Surplus and the Euro Zone Demise

Here are some figures someone should have explained to Mrs. Merkel, before she coerced European leaders (with the exception of Mr. Cameron, the UK prime minister) into fiscal fundamentalism.

First, a look at German savings:

With a slow growing economy, Germans save every year €130 billion, or 6% of their income, that they have to lend abroad. With the exception of the government, all sectors of the economy are net savers. Even the government managed to run a balanced budget during the financial crisis of 2008.

The problem with this Teutonic frugality is that it puts a burden on its trading partners, in particular those in the Euro Zone. Germany is currently running a current account surplus of about €140 billion per year, of which more than half (€73 billion) with her Euro Zone partners (of which Italy, Spain, Greece and Portugal account for half):

Simple national accounting arithmetic tells us that the reverse picture of a surplus is a deficit. Therefore, a reduction in the external deficits in the southern European countries will have to be matched by a partial reduction of the German surplus.

Should Germany succeed in the policy of bringing its Government deficit to zero as well those of the other Euro countries, this would have to be matched either by an increased external surplus (with the US, UK and other countries) or by a reduction in German economic growth and savings. Lower growth with the same rate of saving by Germans will depress the exports of other Euro area deficit countries to Germany and will depress further their growth in a recessionary spiral.

In summary, the misunderstanding of economic interdependence between Euro Area member countries and Mrs. Merkel housewife economics risk ruining the rest of Europe.

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