Monday, March 2, 2015

What Has Happened to Trade Balances in Europe?

It has gradually entered our awareness that the Greek trade account is now balanced. Greece no longer depends on financial markets (or official transfers, or remittances from workers abroad) to finance its imports. This is obviously important for negotiations with the "institutions," or at least it ought to be.

I was wondering, how general is this shift toward a positive trade balance. In the FT last week, Martin Wolf pointed out that over the past five years, the Euro area as a whole has shifted from modest trade deficits to substantial trade surpluses, equal to 3 percent of euro-area GDP in 2013. He does not break it down by country, though. I decided to do that.

Euro area trade ratios, 2008 and 2013. The size of the dots is proportional to total 2008 trade.

Here, from Eurostat, are the export-import ratios for the euro countries in 2008 and 2013. Values greater than one on the horizontal axis represent a trade surplus in 2008; only a few northern European countries fall in that group. Meanwhile, in seven countries imports exceeded exports by 10 percent or more. By 2013, the large majority of the euro area is in surplus, while not a single country has an excess of imports over exports of more than 5 percent. The distance above the diagonal line indicates the improvement from 2008 to 2013; this is positive for every euro-area country except Austria, Finland and Luxembourg, and the biggest improvements are in the countries with the worst ratios in 2008. The surplus countries, apart from Finland, more or less maintained their surpluses; but the deficit countries all more or less eliminated their deficits.

So does this mean that austerity works? Yes and no. It is certainly true that Europe's deficit countries have all achieved positive trade balances in the past few years, even including countries like Greece whose trade deficits long predated the euro. On the other hand, it's also almost certainly true that this has more to do with the falls in domestic demand rather than any increase in competitiveness.

This is shown in the second figure, which gives the ratio of 2013 imports to 2008 exports on the vertical axis, and 2013 exports to 2008 imports on the horizontal axis. (This is in nominal euros.) Here a point on the diagonal line equals and equal growth rate of imports and exports. Most countries are clustered around 15% growth in imports and exports; these are the countries that had balanced trade or surpluses in 2008, and whose trade ratios have not changed much in the past five years. Only one country, Estonia, has export growth substantially above the European average. But all the former deficit countries have import growth much lower than average. (As indicated by their position to the left of the main cluster.) It's evident from this diagram that the move toward balanced trade in the deficit countries is about throttling back imports, not boosting exports. This suggests that it has more to do with slow income growth than with lower costs.
Again, the sizes of the dots are proportional to 2008 trade volumes.

Still, the fact remains, trade deficits have almost been eliminated in the euro area. Liberal critics of the European establishment often say "not every country in Europe can be a net exporter" as if that were a truism. But it's not even true, not in principle and evidently not in practice. It turns out it is quite possible for every country in the euro to run a trade surplus.

The next question is, with whom has the euro area's trade balanced improved? Europe outside the euro, to begin with. The country with the biggest single increase in net imports from the euro zone is, surprisingly, Switzerland, whose deficit with the euro area has increased by close to 60 billion. Switzerland's annual trade deficit with the euro area is now 75 billion, about a quarter of the area's overall trade surplus. Norway and Turkey have increased their deficits by about 15 billion each. The rest of the increase in net exports are accounted for by increased surpluses with Africa (26 billion), the US (27 billion), and Latin America (35 billion, about half to Brazil), and a decreased deficit with Asia (135 billion, including a 55 billion smaller deficit with China, 30 billion smaller with Japan and 20 billion with Korea). Net exports to Australia have also increased by 10 billion.

Why do I bring this up? One, I haven't seen it discussed much and it is interesting.

But more importantly, the lesson of the Europe-wide shift toward trade surpluses is that austerity can succeed on its own terms. I think there's a tendency for liberal critics of austerity to assume that the people on the other side are just confused, or blinkered by ideology, and that there's something incoherent or self-contradictory about competitiveness as a Europe-wide organizing principle. There's a hope, I think, that economic logic will eventually compel policymakers to do what's right for everyone. Personally, I don't think that the masters of the euro care too much about the outcome of the struggle for competitiveness; it's the struggle itself -- and the constraints it imposes on public and private choices -- that matters. But insofar as the test of the success of austerity is the trade balance, I suspect austerity can succeed indefinitely.


UPDATE: In comments Kostas Kalaveras points to a report from the European Commission that includes a similar breakdown of changes in trade balances across the euro area. There's some useful data in there but the interpretation is that almost all the adjustment has been structural rather than cyclical. This is based on estimates of declining potential output in the periphery that I think are insane. But it's interesting to see how official Europe thinks about this stuff.

42 comments:

  1. Liberal critics of the European establishment often say "not every country in Europe can be a net exporter" as if that were a truism. But it's not even true, not in principle and evidently not in practice. It turns out it is quite possible for every country in the euro to run a trade surplus.

    Its only impossible for every country in a closed economy to run either a positive or negative current account balance simultaneously owing to accounting identity.

    What it means for the EZ as a whole to be running a current account surplus is that other counties must offset this with a deficit.

    Not all countries in the global economy can offset domestic private saving desire wrt to net financial assets through the external sector, without relying on fiscal deficits. So the result is some countries running current account surpluses and aiming at fiscal balance, while other must run current account deficits and fiscal deficits in that case.

    China, Japan and Germany are chronic net exporters, and the EZ project is for the entire EZ to become a net exporter too. How long is that viable politically for countries that run chronic courant account deficits before there is a reaction?

    Of course, it's not really an issue economically if other countries offset the resultant importation of unemployment in the form of embedded labor by running larger fiscal deficits to maintain effective demand sufficient for full employment, but that is considered to be a off the table politically in the currency environment. 74% in the US are favorable to a balanced budget amendment, for example (without understanding the consequences).

    This doesn't appear to be a sustainable course for globalization given the current mindset, even though the net importers are getting the benefit in real terms, receiving other countries resources and having foreign workers to the work, too.

    But if a country the like the US were smart, it would welcome the advantage in real terms and run a fiscal deficit sufficient to offset net saving desire and manage effective demand at full resource utilization including human resources. But that seem to be too much to ask politically in the current environment.

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    1. Its only impossible for every country in a closed economy to run either a positive or negative current account balance simultaneously owing to accounting identity.

      Yes, of course. But people often suggest that as practical matter it's not realistic for every country in the EZ to be a net exporter. That's an empirical claim that appears to be false.

      I think a useful way t think about the larger question is in terms of Varoufakis' "surplus recycling" mechanism. Financial flows and trade flows are largely independent of each other, and neither exchange rates nor interest rates (nor domestic prices) work reliably to bring them into balance. So international stability requires that the patterns of trade imbalances happen to offset the patterns of financial imbalances, or that you have a specific institutional setup designed to bring this about.

      Either the financial centers, the international liquidity providers, need to run current account deficits, or they need to be the sources of large , stable outflows of FDI and/or official transfers. There's nothing inherently unsustainable about such an arrangement, and nothing inherently sustainable about a system of balanced trade. On the contrary, in a world of mobile capital it's balanced trade that is unsustainable, since financial flows will usually be unbalanced.

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  2. Although it does has its problems, one can also look at cyclically adjusted current accounts to get a feeling of how much of the improvement is structural rather than cyclical.

    Take a look at table 1 here: http://ec.europa.eu/economy_finance/eu/forecasts/2014_winter/box2_en.pdf

    It does seem that periphery countries managed to lower their cyclically adjusted current account balances significantly although not to a surplus position.

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    1. I don't think the approach there is getting at what we are interested in. What we want to know is how much of the improved trade balance comes from shifts in total expenditure or demand in various countries, versus how much is expenditure-switching (which includes competitiveness.) But they are defining "cyclical" strictly in time-series terms, which is quite different. They say:

      "The data show that most of the rebalancing in the vulnerable economies has been due to a contraction in their domestic demand (and thus imports). But much of this contraction has been non-cyclical."

      So the table there is quite misleading -- it suggests that adjustment has mostly happened through relative prices when in fact it has mostly happened through slower growth in the periphery. Their "structural" adjustment may be partly relative-price changes but mostly means permanently lower growth in the former deficit countries.

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    2. As I already said I always find cyclical adjustment based on production functions wanting. Nevertheless, the above mentioned metric can be helpful in two ways:

      1) Since it calculates the current account balance that would prevail if the country AND its trading partners had zero output gaps it incorporates slower (potential product) growth in the periphery which by necessity improves the structural balance.

      2) As long as the structural calculations include sectoral shifts inside potential products (such as resources moving from the construction sector to tourism) the structural adjustment will not only be the result of relative prices but also sectoral adjustments.

      In general, structural adjustments will be the result of structural shifts in relative incomes, prices and sectoral components of the potential output. Obviously the EC/IMF structural current account balance calculations will only be an approximation.

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    3. Well ok but all the action here is in the estimates of potential output. I think it's quite misleading to have this "structural" component which is a mix of expenditure switching and some income effects, and then a "cyclical" component which is the rest of the income effect. Much more straightforward to just decompose the change into price and income. Of course you still need to estimate income-elasticity of trade flows to do that, but the results are easier to interpret and less ideological.

      In this case, it is clear that the statement that the cyclically adjusted balances are very close to the actual balances amounts to a claim that we should not expect any income convergence within Europe.

      So, no I don't think the issue is that it is just an approximation. I think the real problem is in what it is trying to approximate.

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    4. I haven't looked at the thing real closely, but it seems to suffer from both (1) the generic problem of time-series estimation of potential output, which is that any persistent deviation is treated as structural by definition; and (2) the more unusual confusion of treating home output, home expenditure, foreign output and foreign expenditure as if they were four independent variables, when obviously they are only two. This nonsensical approach might be the result of trying to combine a production-function model of supply-determined output onto a Keynesian model of demand-determined output without realizing that it can't be both.

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    5. The main manual for the potential output calculations of the EC is here: http://ec.europa.eu/economy_finance/publications/publication746_en.pdf

      They suffer from a number of serious problems such as using a C-D production function and assuming a NAIRU which clearly depends on past unemployment rates.

      Mind you that one of the results of even this approximation is that output gaps are still extremely high while most periphery countries have clearly lost in terms of potential product since the crisis started in 2010:

      https://kkalev4economy.files.wordpress.com/2015/03/euro-periphery-potential-product-and-output-gaps.jpg

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    6. Thanks -- now I have read it carefully and of course they did not do anything as silly as I suggested.

      But in a way, what they do, while logically consistent, is even worse. Look at Fig. 3. Their claim that Spain's current account adjustment has almost all been structural is based on the assumption that potential output in Spain has not risen at all since 2006 or so. This despite the fact that the working-age population and labor productivity in Spain have continued to rise. This is nuts.

      And then of course the lesson is that there can be no more current account deficits -- n fact Spain must run current account surpluses in order to reduce its external debt. So Spanish income can only increase to the extent there is a shift in demand toward Spanish exports.

      Of course it's not as if it's physically impossible for Spanish living standards to rise without higher imports. What is the case is that, given current expenditure patterns, an increase in Spanish incomes will result in higher imports as some of the new spending falls on foreign goods, and those imports will have to be financed. The unstated alternative would be to take some policy to change expenditure patterns, either a devalued currency or direct restrictions on trade flows. But that's not even considered. That's where we are at this point -- the benefits of a European free trade area, whatever they may be, are apparently so great that it's worth sacrificing economic growth entirely for them.

      Thanks for pointing me to this. I hadn't realize dhow bad this stuff was.

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    7. The explanation of potential output is interesting -- thanks for that. It would be interesting to se what's driving the claim of declining potential output in Spain, Italy and Greece. Despite the claim that this is an economic rather than a statistical model, there are a couple of HP filters in there, for labor force participation and TFP growth. The calculation of NAIRU also seems to exclude by construction the possibility of deviations of actual U from the NAIRU lasting more than a few years. So I suspect that for all the song and dance about economic theory, this means that any deviation of output from trend lasting more than a few years is going to get interpreted as a change in potential output, just as much as with purely statistical approaches.

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    8. I wish I understood this stuff better!

      It SEEMS to me that starting with a Cobb-Douglas production function and then estimating TFP growth with an HP filter, will get you the exact same results as just using the filter to get trend output directly. So the "theory" is just decoration. But I could be wrong about that?

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    9. "This despite the fact that the working-age population and labor productivity in Spain have continued to rise."

      Actually things are different (look at AMECO data). Working age population in Spain has been falling since 2009 (it has fallen 2.8% until 2014, a reduction of almost 1mn people). The capital stock has also been increasing with low growth rates. Since 2002 average annual hours per person employed were on a secular decline while at least based on the EC calculations TFP was actually stagnant during the Euro decade with a slight drop up to 2009.

      Potential output growth up until the crisis was mainly the result of the increase in the population (driven by immigration) and of the capital stock created by construction investment (which was the main component of investment that registered a substantial increase during the boom years).

      I totally agree though that the way detrending is done in order to calculate potential output, guarantees that a low growth period will translate into a low potential output growth. For instance AMECO thinks that the Spanish NAIRU has increased from 13% during 2007 to over 19% today (which obviously combined with the lower working age population lowers potential output).

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    10. Thanks for the correction.

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  4. Maybe that's the logic behind austerity and EU/EZ in general. To force Europe to net export. Question is where is the other side of these surpluses? I bet at least 60% of them went across the puond to US.

    Export is a real cost , import a benefit so IMHO there is nothing to be happy about.

    Today's class war is fought between workers and exporters.

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    1. Did you not read the rest of the post? Very little of the increased exports went to the US.

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    2. I meant general exports but you are right I overstated America's share. Let's watch how the situation progresses.

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  5. I'd imagine the liberal critics of austerity care a lot more about employment, median income and GDP growth than about trade balance.

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    1. You're right, it's not written very clearly. What I meant is that liberal critics imagine that austerity must eventually fail even on its own terms. You're right, it's already failed on the terms they (we) care about.

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  6. Good Post. However, I don't understand your baseline scenario -- you are predicting a secularly shrinking EU economy continuously running surpluses vis-a-vis the U.S. while the U.S. experiences higher interest rates and inflation than the EU? It seems a bit backwards.

    It's very hard for an economy the size of the EU (with a floating exchange rate) to be a persistent net exporter over, say, a decade. I'm not sure anything like that has ever happened, although it would be interesting to look.

    I totally buy that small nations can be export powers for 10-20 years if they are willing to intervene in the forex market and pay the price of whatever distortions this creates within their own economy. I don't buy that the EMU will manage to do this with floating rates. A one year surplus of 3% is not so remarkable given the decline of the Euro and the decline in income.

    What's perhaps more interesting is how long Germany can keep it up and at what cost to the EU project.

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    1. you are predicting a secularly shrinking EU economy continuously running surpluses vis-a-vis the U.S. while the U.S. experiences higher interest rates and inflation than the EU?

      Persistent EU surpluses, and slower growth but not absolute falling incomes. Some of the surpluses can go to the US, but most will not. They will either go to other safe-asset providers liek Switzerland, or to a rotating mix of middle-income and developing countries that can sustain large financial inflows for a while. The EZ has already moved to surplus with Korea, in five years they might have a surplus with Japan, in ten years with China. Why not? There's always somewhere that can be induced to become a net borrower.

      It's very hard for an economy the size of the EU (with a floating exchange rate) to be a persistent net exporter over, say, a decade.

      I don't agree. In a world where cross-border payments were mainly associated with trade flows, this would be true. But today, cross-border financial flows are much larger than trade flows, autonomous, persistent and unbalanced. Floating exchange rates will adjust to equate supply and demand in foreign exchange markets, but there is no reason to expect this adjustment to move everyone toward balanced trade.

      I totally buy that small nations can be export powers for 10-20 years if they are willing to intervene in the forex market

      Lots of countries with floating rates have substantial trade surpluses or deficits persisting over decades. if anything, it's balanced trade that is the exception. Again, you are imagining the econ-textbook world where cross-border payments are mainly about the exchange of goods. They are not.

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    2. Also, glad to see you are blogging again!

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    3. "Lots of countries with floating rates have substantial trade surpluses or deficits persisting over decades."

      Not really. You're talking about the resource exporting nations + East Asian export-led growth economies. Then Switzerland, Belgium, Netherlands.

      Generally, 70% of the time, the "average" nation runs a current account balance, and 30% of the time it runs a surplus. A small group of nations run surpluses and everyone else runs deficits. Getting into that surplus group is very difficult, and not possible for a large economy unless you are impose drastic capital controls and domestic financial control. If you are a small nation, then running a surplus against a big nation wont affect the big nation much, so you can keep doing it. When you are a big nation, the reduction in income in your target is going to cause your target to reduce rates and will slow income growth there, making the surplus harder to maintain. So a small group of small nations run surpluses against big nations, but not the other way around. Here the east asian economies are something special, not something that the EU can emulate. Even China's balance is dwindling (as a % of GDP) and Japan is back to a deficit.

      "They will either go to other safe-asset providers liek Switzerland, or to a rotating mix of middle-income and developing countries that can sustain large financial inflows for a while"

      They have to go to the safe asset providers. Brazil wont accept EMU capital -- well, it will accept it but tax it, so the EMU holder of reals will park their earning *somewhere safe*. They will park it in the US, and this means that the US bears the ultimate burden of the deficit, not Brazil, even if the EMU runs the surplus against Brazil. The number of safe places where you can park that surplus is small and many are adopting negative rates now -- effectively taxes on capital flows:

      US
      UK
      Japan
      Canada
      Australia
      Sweden
      Norway
      Netherlands
      Denmark

      They all have problems with current account balances that are headwinds for recovery. The situation is turning into a bloodbath. Having the world's largest economy attempt to run surpluses against them is going to quickly drive rates in these countries up until the marginal exporting firm decides to park the revenues in an EMU asset, at which point the euro will appreciate until the current account balance goes away.

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    4. Well, this is an empirical question: Are the trade balances of countries with floating rates stationary around zero?

      I think you are correctly describing some obstacles to a generalization of the pattern of persistent trade imbalances offset by persistent net financial flows. But the fact that there are obstacles doesn't mean it's impossible.

      Having the world's largest economy attempt to run surpluses against them is going to quickly drive rates in these countries up until the marginal exporting firm decides to park the revenues in an EMU asset

      Can you expand on this a little? I don't think I follow the logic here.

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    5. If there are two countries, but the GDP of A is 1/2 of B, then when A wants to run a 5% surplus of it's GDP this is only a 2.5% hit to the GDP of B. Not very interesting, but important in that the net imports of B are equivalent to excess savings demands in B’s markets (transferred from A). B can absorb those additional savings demands with a smaller rate reduction than would be the case if A was larger.

      If you want to think in terms of income flows, the reduction in income from net imports has to be accommodated by a reduction in rates to keep B from going into a recession or, more realistically, to help B get out of a recession. The size of the rate cut will depend on the size of the excess savings demand in B’s economy, not in A’s economy. A can get away with exporting a large share of its GDP to B if the economy of A is small. When the economy of A is big, it’s much harder for B to absorb A’s imports.

      Once B cuts rates, this should result in B devaluing against A, so A cuts its own rates. Then B cuts rates, etc. At some point both nations have rates at zero. At that point the game is over for A, in terms of exporting away its excess savings demands.

      The size of the capital markets is another issue. Suppose the world consists of a small nation, A, that has 10% of the world’s assets, and a large nation, B, that has 90% of the world’s assets. Both exporters store their money in a global basket weighted 90% B and 10% A (no home bias). Then A will naturally end up exporting 9 times what it imports. I.e. being big makes you a natural importer, being small makes you a natural exporter. But say there is a home bias — 80% of the proceeds are always invested at home and 20% in the global basket. In that case, A will export about $100 to B for every $80 that B exports to A. B, the Big Country, is still a natural importer, and the small country is a natural exporter.

      Now you don’t generally get a lot of trade between small and big countries — trade is more between big countries with each other — and I think this is one reason why.

      Unless you are swimming in oil, you have to overcome a lot of obstacles and end up with some stringent capital controls or domestic financial controls if you want to be a big country and also be a big exporter for a time period long enough that the chaos of capital flows converges to fundamentals.

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  8. It would be helpful to provide a link or quote to the liberal critics who were only talking about Europe.

    I do think it was a helpful exercise to show what's happening with European trade.

    But consider that the IMF is giving advice to Greece on how to be competitive and it's not just the ECB and Eurocommission dictating a continent-wide industrial policy or export strategy.

    The IMF can't give the same advice to every nation on Earth, that's the point I've read liberals like Krugman make. I think you are right that some nations can run budget deficits and use monetary policy to create inflation. But the EU is all about keeping money-claims sacrosanct. What is the IMF about? The Washington Consensus?

    I agree that the Eurocrats aren't primarly concerned with "competitiveness' in winning the globalization trade race as perhaps we sterotypically think of with Japan and China.

    They seem to be more about the ordoliberalism for its own sake and for disciplining the periphery: low inflation, minimum budget surpluses, dismantling of the welfare state and deregulation of labor markets, privatization, etc. See the ECB's letters to Spain and Italy as you yourself have pointed to.

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    1. What about what Dave Beckwoth - among others - has to say about the poor design of the currency union with a central bank that wants to keep inflation low in Germany and deflation for the periphery?

      http://macromarketmusings blogspot com/2015/03/the-origins-of-eurozone-monetary-policy.html

      Certainly that makes it harder for the periphery to adjust no matter their trade balances.

      Without fiscal transfers it doesn't look like this will work. There will political pressure to push back on budget austerity as we're seeing with Syriza and Podemos.

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    2. the EU is all about keeping money-claims sacrosanct. What is the IMF about? The Washington Consensus?

      I agree that the Eurocrats aren't primarly concerned with "competitiveness' in winning the globalization trade race as perhaps we sterotypically think of with Japan and China. They seem to be more about the ordoliberalism for its own sake and for disciplining the periphery: low inflation, minimum budget surpluses, dismantling of the welfare state and deregulation of labor markets, privatization, etc.

      Right. I probably should have said that in this post. (But I have said it plenty of times elsewhere.)

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    3. Without fiscal transfers it doesn't look like this will work.

      I think it can work fine. The periphery doesn't need deflation, just slower growth. Maybe that will provoke a political reaction -- I hope so! But there's no law of nature or economics that says it can't work. It's just balance of payments constrained growth. History is full of similar arrangements lasting for decades, the gold standard being exhibit A.

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    4. I think that "ordoliberalism", in itself, is actually quite pro welfare state - or at least it was pro welfare state when the term was created, maybe currently the term refers to something that is more neoliberal than ordoliberal.

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    5. What I mean is that I think that german ordoliberals were more or less the same that italian democristiani [Christian Democrats], and to the french model of dirigisme: these were economic theories that were very "statist" for the standards of today.
      I stress this because it seems that Merkel is seen as some Hayek fanatic, whereas she is mostly a centrist AFAIK.
      The problem is that there has been a turn towards anti-statalism since the 80s, not the ordoliberals in particular.
      Piketty, for example, who is quite leftish, while he is for higer tax rates on capital is against inflation and against government deficits.
      If Piketty thinks this way then it's not strange that Merkel is also against deficit spending and inflation.

      This is the reason that I think that this emphasis on competitivity is mostly due to ideological blinkers, I think that Merkel et al. don't really realise that they are causing a chase to the bottom of the wage share.

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  9. "It's evident from this diagram that the move toward balanced trade in the deficit countries is about throttling back imports, not boosting exports. "

    If the fact that the EU moved to an aggregate trade surplus is mostly due to decreased imports, this means that some countries are exporting much less to the EU than they did before, while importing the same. Even if things stay this way, the world would be trapped in an below-potential equilibrium, with high unemployment and an excess of capital goods (that means low real investiment for some time). I don't see this as a stable condition. Plus, those countries that are exporting less to the EU, like China, will face increased unemployment, and might try to increase "competitiveness" themselves.

    Also, if we frame the story as international trade flows, we lose the point that also in exporting countries debt levels are rising AFAIK, ant at a world level total gross debt to GDP is rising. My opinion is that this happens because there was a general fall in the wage share, and as a consequence much of the consumption of final consumption goods is debt financed (directly or indirectly). I think this trend also can't go on forever.

    Thus on the whole I don't think that a large EU surplus can be a stable condition.

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  10. But more importantly, the lesson of the Europe-wide shift toward trade surpluses is that austerity can succeed on its own terms.

    So most people not having enough money to buy imports is the definition of success? I think it would have been easier to deport the highest importers until exports and imports balanced and not beggar most of the people. But then, I'm an engineer not a neo-liberal economist, so I do have some scruples

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  11. Here's a nice write up on http://fistfulofeuros.net/afoe/does-the-arrival-of-negative-interest-rates-change-the-attractivess-of-emu/


    "While countries like Switzerland and the UK saw their currencies appreciate during the existential Euro crisis due to their “safe haven” status, what is happening now is a quite different phenomenon. In the first phase money was fleeing the currency union fearing conversion risk, now it is being driven out by an explicit policy of the central bank. At the very same moment Greece was being pushed near to the point of introducing capital controls to stop capital flight, Denmark was rumored to be near to introducing them to stop capital inflows."

    "SNB lowered the deposit rate rate from -0.25% to 0.75% [...] Negative rates have even started to reach corporate bonds, raising the possibility that companies could eventually be paid to borrow the money to proceed with share buy-backs."

    "Danmarks Nationalbank’s constant lowering of the deposit rate (3 times in three weeks) to a current global record low of minus 0.75%."

    etc.

    RBA, CDN are the only holdouts with positive rates now. RBA cut rates yesterday. "“Global developments have left us with a higher exchange rate and lower interest rates than would otherwise have been the case,” Lowe said in a speech in Sydney Thursday. “We may not like this configuration, but developments abroad give us little choice.”

    Here, it's a race to the bottom because of the importance of capital flows. E.g. you can run a surplus against whomever you want and put the pain on a third party. So whoever has the highest rates ends up as if the entire surplus was run against them. This is strong incentive for everyone to cut rates as global capital thrashes around in search of the next economy to such dry of demand.

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    1. It's an interesting change from the old days, isn't it? The big criticism of the gold standard, and to some extent of the Washington Consensus era, was that the burden of adjustment was put on the deficit countries which had to move toward current account balance by raising rates, reducing the supply of money and credit. Everybody trying to offer higher returns to attract foreign investment. Now here we have the opposite case, countries competing to offer lower returns to deter capital inflows. It's an interesting change, isn't it? -- and not necessarily for the worse.

      Seems like the bigger concern is not Switzerland or Australia but poor countries that might be induced to take on foreign debt that will become unsustainable when/if high rates return. But there doesn't seem to be much of that right now.

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    2. It's very different, yes! I wish I knew more trade history to compare this to earlier trade boom periods -- say what happened to the Dutch in the 17th Century, or in the inter-war period.

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  12. Weisbrot on Podemos and Spain:

    http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/next-up-podemos-in-spain-european-officials-will-have-to-change-course

    "The International Monetary Fund (IMF) projects unemployment to still be at 18.5 percent in 2019. This is assuming that things go according to plan, and ignoring that IMF projections have tended to be over-optimistic in the past few years. But the most outrageous part of this forecast is that the IMF is also projecting that the Spanish economy in 2019 will be very close to full employment. In other words, the Fund – and by extension the European authorities— are saying that something like 18 percent unemployment is basically full employment for Spain."

    That's insane. This is related to their estimates of "declining potential output" no?

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    1. Exactly. Insane is the word for it.

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    2. "it's the struggle itself -- and the constraints it imposes on public and private choices -- that matters"

      Well stated. Just the other day Norbert Häring (in quite difficult German) wrote about how this works out in Germany. There is a committee with people from the government, business, banks, local government and the unions. The task of the committee: to investigate a plan to privatize the German highways (read it again). Now remember that the German government is supposed to have a 'Schwarze Null' (black zero) government surplus, i.e. a slight surplus in normal times (now is a normal time). So, the government is (austerity constraint) not allowed to borrow additional funds. Which means that the new owners of (part of) the system of highways have to borrow money for maintenance, repair, upgrading and new highways. AT A MUCH HIGHER RATE THAN THE GERMAN GOVENRMENT HAS TO PAY. From, for instance, Deutsche Bank, the main bank inside the committee - as the government is indeed constrained. Deutsche Bank is of course very large but also pretty weak, so guess who will be the main risk taker... The unions and the local govenrments did not agree (yet) - the other partners liked the idea.



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