Germany rejected the US Treasury’s criticism of the country’s export-focused economic policies as “incomprehensible”. Much has been said about that. Let me just add some pieces of evidence, just to gather them all in the same place.
Exhibit #1: Net Lending Evolution
Note#1 : I took net lending because because net income flows from residents to non residents (not captured by the current account) may be an important part of a country’s net position (most notably in Ireland). Note #2: I took away France and Italy from the two groups called “Core” and “Periphery”, because their net position was relatively small as percentage of GDP in 2008, and changed relatively little.
In 2008 the periphery had a deficit of around 10%, while the core (mostly because of Germany, of course) had a surplus or slightly more than 6%. Since then, the adjustment of peripheral countries has been dramatic (their net lending was virtually zero in 2012), but the core surplus actually increased, to 7%. The adjustment, reflecting the Berlin View, has been asymmetrical. Considering that Austria and FInland actually played the rebalancing game (see exhibit #2 below), the blame is on Germany and the Netherlands.
Also, the red line explains why the US Treasury woke up today (and the IMF, and the Commission). The adjustment of peripheral countries, and the continuing surpluses of the core have moved the eurozone as a whole from a substantial balance to a small but not negligible (1.9%) surplus. The eurozone as a whole today is a net saver, and therefore contributes to depress aggregate demand at the global level. The second largest economy of the world is basically free riding on the rest of the world. And these guys complain. Incomprehensible? Really?
Exhibit #2: Net Lending Change, Country Breakup
Exhibit #2 breaks the two groups into countries. Blue bars indicate changes that go in the direction of rebalancing. All deficit countries (with the exception of France, that was virtually unchanged and, it is worth repeating has a small deficit) are blue, meaning that they reduced their deficit (thus rebalancing). Finland and Austria also rebalanced, reducing their net position (Finland is today a net borrower). Germany and the Netherlands actually increased their already significant surplus, thus (a) contributing to perpetuating the imbalances; (b) making the periphery’s adjustment more painful than needed. Incomprehensible? Really?
Exhibit #3: Composition of Rebalancing in the Periphery
With the exception of Ireland, and partially of Spain, the adjustment mostly relied on a substantial decrease of imports, due to the recession and to the brutal drop in purchasing power in peripheral countries. This depicts more agonizing economies than the evolution into dynamic export-oriented countries. Incomprehensible? Really?
So, nothing new really. But enough to reach a verdict: Guilty as charged.