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Saturday, August 18, 2012

Is Germany Europe's engine?

The Economist writes that Germany, Europe's engine, is getting tired? Is Germany really Europe's engine?

I would have thought that the US has been the world economy's engine for several decades now. Why? Because Americans consume so much and they buy much of the stuff which they consume in the rest of the world, thereby stimulating economic activity there.

Germans are not known as consumption addicts and they certainly don't import so much more than they export.

I may be wrong but I would have thought an engine is that part of the car which makes the car move. Wouldn't Germany be Europe's engine only if it consumed a lot more and if it bought the stuff they consumed in the rest of the world, or at least in the rest of the Eurozone?

9 comments:

  1. No, the gas in the tank is what makes the car go. A clapped out V-dub with a full tank will get you a lot further than brand new Maserati Stradale with an empty tank.

    Countries that consume a lot tend to have high rates of home ownership. Germany has one of the lowest, if not the lowest, rate of home ownership in the OECD. I read somewhere that the average age of a refrigerator in Germany almost twice that of those in US and UK. Do Germans buy better 'fridges than Yanks or Brits, or do they keep them longer - probably both.

    Germany is Europe's biggest importer, but it doesn't import to consume, it imports to transform into exportable goods - same as Japan, Korea, China and similar economies. Germany has been a mercantile state since its formation in 1871; since 1241 if you see the Hanseatic League as the precursor for modern Germany.

    You wont turn Germans into net consumers this side of the next century, or more likely the next millennium. Better get used to it - its been ever thus.

    Be careful of what you wish for, you're likely to die disappointed.

    CK

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    1. I think it's very much a cultural thing. Judging from my own experience, I went though 12 years of schooling before College, supposedly even advanced schooling, but at the mature age of 18 I did not have the slightest idea how an economy worked. One of our gymnasium professors once gave us a lecture how he would never buy a product from a company which did advertising. His reason: I just want to pay for the product; I don't want to pay for their advertising. That seemed to make sense to us at the time.

      Of course one would keep appliances at least for a couple of decades (Miele was proud that their appliances lasted much longer than that). Everything else would have been considered as a waste of money, and money was there to be saved.

      I got my crash-course on economic thinking when I went to the US as an exchange student at the age of 18. Those Americans were just wasting so much money for "unnecessary" purchases! That's when I started pondering that perhaps the faster a dollar moves through the economy, the more cents it leaves here and there.

      To this day, my purchasing habits - unconsciously - are driven by how much money I want to spend and not by what I would like to buy. It's a bit like the habit of still mentally converting the Euro into the Austrian Schilling.

      I hasten to add: even Germans and Austrians have become spendthrifts compared to 30-40 years ago but it's just far from the spending mentality of other cultures.

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    2. Personally, I am an admirer of Switzerland. The Swiss seems to be rational people who think rationally how they should run their society, etc.

      I see in Switzerland a near-perfect federal society; a sensational infrastructure; excellent health and social services; a balanced budget and --- low taxes!

      Now, some argue that this is only possible because Switzerland lives off the black money from other countries. I don't buy that argument. The Swiss simply have a culture to think about what they are doing and who check all the time whether it makes sense what they are doing.

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    3. More on Switzerland: just the thought that a people would vote - in a plebiscite - NOT to increase annual vacations appears mindboggling in a country like Austria where 99,9% would vote for it.

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  2. "Germans and Austrians have become spendthrifts"

    this is the unseen part of the eurozone. In Germany especially, the ordinary person has seen their income fall in real terms. This has allowed Germany to keep its competitiveness to some degree - that and intense efficiency.

    The point of this is that people have less money to spend. Just look at the supermarkets, Aldis and Pennymarkts - where is Plus now? Most (if not all) have gone, but thrive in the Netherlands. People do not have the disposable incomes they once had and with a culture that does not allow for borrowing, this has an immediate effect. Klaus will know that the other side of this is regulation of lending - a control that would have kept America sane if contrite - it has kept the Northern economies on a firmer footing than others. Remember that it is still possible to get a mortgage in the UK without a credit check (although they do now check 50%! Imagine!!) - you cannot get a mobile phone contract without a credit check in Germany, let alone a mortgage!

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  3. "I see in Switzerland a balanced budget."

    So, what you see in Switzerland is that the private sector is capable of driving the economy.

    But in countries where the private sector isn't capable of doing so (a certain country whose name this blog has, comes to mind) budget deficits are necessary.

    Really, I wish we could just get past this thing about budget deficits. Somebody must be in deficit. It is just a question whether that someone is the government, the private sector, or the external sector. They can't all be at surplus at the same time. It's that simple. It's called sectoral balances.

    So when you (or Europe) advocate that the government should be in surplus, what you really advocate is for either the private sector, or for the external sector, to be in deficit.

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    1. Point me to the place, in my entire blog, where I advocated that the Greek budget should be in surplus! Point me to the place, in my entire blog, where I argued that the one and only thing which counts about Greece is the budget!

      I can point you all over my entire blog where I argue that what matters at the end of the day is a well-functioning private sector which does so well that it can provide the government with all the revenues they need to finance their follies (like in Austria).

      I get the feeliong that you simply refuse to accept one basic fact: an economy needs to generate value to support the living standard of its people. If it doesn't generate value, it can maintain the living standard for some time by borrowing money from offshore, but it can't do that forever. The alternative then is that the living standard tanks.

      Greece's private sector is incapable of driving the economy? C'on! Greece wouldn't have such a substantial shadow economy if Greeks did not know what supply/demand is and how to profit from it!

      I agree with you that Greece cannot build up some form of a mid-market manufacturing sector (which it needs badly!) with the present EU-freedoms of free products/capital movement because one cannot expect Greece to learn overnight how to compete with, say, Germany. That is why I have argued for some form of "infant industry protection" to give the Greek private sector some time to become competitive.

      If you really believe that the Greek budget deficit is necessary because the private sector is incapable of living up to its part, you should really vote for Communism. That's how communist economic models work. Except, I haven't seen them working well anywhere so far.

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    2. "I can point you all over my entire blog where I argue that what matters at the end of the day is a well-functioning private sector which does so well that it can provide the government with all the revenues they need to finance their follies (like in Austria)."

      1) A sovereign doesn't need revenues from the private sector to finance anything.

      2) Budget-deficits and taxation are means in order to regulate demand.

      3) If a country is not competitive in the international level, budget-deficits/ taxation and relative protectionism can do an extraordinarily good job at organizing an adequate economy. This has been proven during capitalism's golden period between the 50's and the 70's. Nothing to do with communism.

      4) In that case, the living standard might not be what it (temporarily) was during the bubbles of the liberal years, but it will be good enough, and people will have jobs.

      Warren Mosler, one of the founding fathers of Modern Monetary Theory has put it more eloquently than me.

      http://moslereconomics.com/2012/08/17/euro-area-exports-rose-2-4-in-june/

      PS - The Greek shadow economy tells me nothing. Mostly they're just services that don't pay taxes.

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    3. 1) A sovereign doesn't need revenues from the private sector to finance anything - YOU ARE RIGHT IF YOU MEAN THAT THE SOVEREIGN ALSO GETS ITS REVENUES FROM THE PUBLIC SECTOR. I SHOULD HAVE MENTIONED THAT. I TRUST YOU ARE NOT SAYING THAT THE SOVEREIGN DOESN'T NEED ANY REVENUES AT ALL. IF THE SOVEREIGN GETS ALL ITS REVENUES FROM THE PUBLIC SECTOR, YOU HAVE A SEMI-NATIONALIZED ECONOMY.

      IF YOU DON'T BELIEVE ME, LOOK UP THE GREEK BUDGET. TAKE OUT ALL REVENUES FROM THE PRIVATE SECTOR AND LET ME KNOW WHAT YOU'VE GOT.

      2) Budget-deficits and taxation are means in order to regulate demand - YOU ARE RIGHT IF YOU THINK LIKE KEYNES DID THAT THE STATE SHOULD STIMULATE DEMAND IN DOWN-TIMES, USING RESERVES BUILT UP IN GOOD TIMES. AT SOME POINT WHEN DEFICITS ARE TOO HIGH AND CHRONIC, DEFICIT SPENDING NO LONGER WORKS.

      3) If a country is not competitive in the international level, budget-deficits/ taxation and relative protectionism can do an extraordinarily good job at organizing an adequate economy. This has been proven during capitalism's golden period between the 50's and the 70's. Nothing to do with communism - THE ONLY LONG-TERM WAY TO TACKLE INTERNATIONAL UNCOMPETITIVENESS IS TO LOWER THE EXCHANGE RATE. IF THAT IS NOT POSSIBLE LIKE WITH THE EURO, ONE HAS TO PAINFULLY DEFLATE. I AGREE WITH YOU ON RELATIVE PROTECTIONISM. IN MY BLOG I REFER TO THIS AS "TEMPORARILY WAIVING THE FREEDOMS OF FREE PRODUCT/CAPITAL FLOWS". NO ECONOMY, UNLESS IT IS LARGELY SELF-SUFFICIENT, CAN FOREVER IGNORE WHAT'S HAPPENING IN INTERNATIONAL MARKETS. THE FORMER EASTERN BLOC COUNTRIES TRIED AND YOU KNOW WHAT HAPPENED WHEN THEY MET WITH THE REALITIES OF THE REAL WORLD.

      WHAT A BUDGET DEFICIT HAS TO DO WITH INTERNATIONAL COMPETITIVENESS ESCAPES MY UNDERSTANDING AT THE MOMENT. THE STATE CAN HAVE A DEFICIT AS LONG AS IT WANTS TO AND AS LONG AS IT FINDS SOMEONE WHO FINANCES IT. IF FOREIGNERS NO LONGER WANT TO FINANCE IT, THE STATE HAS TO CONVINCE HIS CITIZENS TO FINANCE IT (POSSIBLY THROUGH FORCES LOANS). IF AND WHEN THE CITIZENS REFUSE TO FINANCE IT, THE STATE HAS TO IMPOSE THAT TAX WHICH ALWAYS WORKS - INFLATION (PROVIDED THAT IT HAS ITS OWN CURRENCY).

      4) In that case, the living standard might not be what it (temporarily) was during the bubbles of the liberal years, but it will be good enough, and people will have jobs - ON THAT I AGREE WITH YOU ENTIRELY. ANY ARTIFICIAL GROWTH (i.e. GROWTH WHERE CONSUMPTION IS FINANCED THROUGH DEBT) WILL EVENTUALLY LEAD TO A DAY OF RECKONING. JUST ASSUME YOU HAVE NO MONEY FOR A TRIP AROUND THE WORLD BUT YOU STILL TAKE IT BECAUSE THE BANK LENDS YOU MONEY. WHEN YOU RETURN, THE ARTIFICIAL PLEASURE OF THE VACATION IS GONE BUT THE LOAN IS STILL THERE.

      YES, I THINK GREECE WOULD BE A LOT BETTER OFF TODAY IF IT HAD NOT TAKEN UP THIS DEBT. MIND YOU, FOR SOME YEARS GREEKS WOULD HAVE HAD TO ACCEPT THAT THEIR INCOMES WERE NOT RISIING AS FAST AS ELSEWHERE BUT IT WOULD HAVE BEEN SUSTAINED GROWTH. AS IT TURNED OUT, PERSONAL INCOMES IN GREECE, SINCE THE EURO, ROSE MUCH, MUCH FASTER THAN THOSE IN, SAY, GERMANY AND NOW THE ADJUSTMENT IS EXTREMELY PAINFUL.

      I WOULD ONLY ADD: SHOW ME THE POLITICIAN WHO HAS THE POSSIBILITY TO ALLOW HIGH INCREASES IN PERSONAL INCOMES BUT WHO DEPRIVES HIS VOTERS FROM IT, ARGUING THAT THIS WOULD NOT BE GOOD FOR THEM IN THE LONG TERM.

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