Germany 6% Current Account Surplus a "Threat to the Continent" Says EU Commission; Solution is Gold Coupled With Eurozone Breakup

Germany's current account surplus has reached six percent, an amount that bureaucrats in Brussels have decided is a threat to the entire continent. The EU commission will likely issue a warning to Germany with threats of sanctions if Germany does nothing about it.

I picked up this story from Eurointelligence which writes "FT Deutschland reports that Germany’s current account surplus is likely to exceed 6% of GDP this year, the threshold which triggers a European Commission warning. The German government maintained its position that there was no problem with current account surpluses. On the contrary, the German economics ministry sees this a “very positive” development. The German government spokesman said yesterday that the problem of imbalances was a problem for a countries with large current account deficits."

Mathematical Insanity

Got that? Allegedly, large deficits are a problem but large surpluses are not.

Given that surpluses and deficits must net to zero, the position that only deficits are a problem is ludicrous. Mathematically, both are problems or neither are problems, because you cannot have one without the other.

Bear in mind it was not Eurointelligence that took a mathematically ludicrous position, but rather articles they referenced.  

Germany's Surplus Could Trigger Collection Procedures

Let's take a look at the Financial Times Deutschland article referenced above (translated from German and further modified by me for ease in reading)
This year Germany recorded its highest trade surplus ever. This could crumble into the Federal Republic 2013 EU-collection procedures.

The new macro-economic early warning system in Europe provides that a current account surplus over 6.0 percent of gross domestic product is a threat to the economic stability of the continent.

The EU urges its members not to allow imports and exports fall apart too far. The early warning system developed Brussels to name mistakes and sanction if necessary. Since this year can be monitored in addition to the current account including private and public debt and the development of the real estate markets.

As part of the EU early warning system Luxembourg and Sweden also have excessive surpluses. In Luxembourg, the current account surplus in 2011 was 6.4 percent of economic output - approximately $4 billion. For the same year, Germany had a surplus of over $200 billion.
Only Deficits a Problem Says Frankfurter Allgemeine

An article in German Daily paper Frankfurter Allgemeine, by business editor Philip Plickert says Only Trade Deficits a Problem.
The very concept of "macroeconomic imbalances" is highly questionable.

If countries have permanently high current account deficits and foreign debts pile up higher and higher, things may not go well. So the Euro periphery has slipped into crisis. Trade deficits were and are an expression of lack of competitiveness. Germany's surpluses are high contrast to the special strength and structure of the local economy.

Germany produces high-quality (investment) goods that are used in emerging countries. This is no cause for concern.
Euro as Gold Standard

In one of the silliest articles ever written about European trade imbalances, Joe Weisenthal writes Actually, There Is A Gold Standard Today, And It's Causing An Economic Catastrophe.
While it's easy to talk about the endless crises under the gold standard days of the 1800s, the truth is that we don't have to go back that far at all.

Europe is a close analogue to a gold standard.

  • Remember, each European country lacks the ability to print their own money.
  • All the European countries have a fixed 1-to-1 exchange rate, with no ability to devalue their currencies to correct trade imbalances.
  • The currency is designed to keep governments accountable, acting as a check on uncontrollable spending.
  • Countries have to raise through taxation or the bond market a certain amount of Euros each year to spend.

Bottom line, [the euro] is a hard money scheme in sheep's clothing.
Notion the Euro Acts Like Gold Standard is Ridiculous

Equating the euro to a gold standard is ridiculous.

The ECB's (Emergency Liquidity Assistance) program acts exactly the opposite of a gold standard by allowing imbalances to accumulate to the point of crisis, a state the Euro is clearly in now.

For further discussion, please see Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"

"The Trade Imbalance Dilemma and Soaring Chinese Debt"

Here are some comments from Michael Pettis that I wrote about in Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited
The strength of the German economy in recent years has largely to do with its export success. But for Germany to run a large current account surplus – the consequence I would argue of domestic policies aimed at suppressing consumption and subsidizing production – Spain and the other peripheral countries of Europe had to run large current account deficits.

Trade Imbalances Lead to Debt Imbalances

The funding by German banks of peripheral European borrowing, in other words, was a necessary part of deal, arrived at willingly or unwillingly, leading both to Germany’s export success and to the debt problems of the deficit countries.

As long as Germany runs current account surpluses for many years and Spain the corresponding deficits, it is by definition true there must have been net capital flows from Germany to Spain as Germany bought Spanish assets (which includes debt obligations) to balance the current account imbalances. The capital and current accounts for any country, and for the world as a whole, must balance to zero.

In the old days of specie currency – gold and silver – this meant that specie would have flowed from Spain to Germany as the counterbalancing entry, and of course this flow created its own resolution. Less gold and silver in Spain relative to the size of its economy was deflationary in Spain and more gold and silver in Germany was inflationary there – until the point where the real exchange rate between the two countries had adjusted sufficiently because of changes in domestic prices to reverse the trade imbalances.

The Current Account Dilemma

In today’s world things are different. There is no adjustment mechanism – specie flow or imperialism – that permits or prevents persistent current account imbalances.

This means that if Germany runs persistent trade surpluses with Spain, there are only three possible outcomes.

First, Spain can borrow forever to finance the deficit (of which the ability to sell off national assets is a subset). [Given the size of Spain], this clearly is not a possible outcome.

Second, Spain can take steps to erode the value of those claims in real terms. It can do this by devaluing its currency, by inflating away the value of its external debt, by defaulting on its debt and repaying only a fraction of its original value, by expropriating German assets, or by a combination of these steps.

[Third] Germany must accept a reversal of the current account imbalances or it must accept an erosion in the value of the Spanish assets it owns as a consequence of the current account imbalances. This is the important point.

Once you have excluded infinite borrowing capacity there are arithmetically no other options.

Given the limits, especially debt limits, it is irrational for anyone to expect that Germany can continue to run large current account surpluses while Spain does nothing to erode the value of Spanish assets held by Germans. I suspect that Germany is hoping and arguing that Spain can somehow reverse its current account deficit without the need for Germany to undermine current account surplus. But this won’t work.
Problem in Europe is Arithmetic, Not Confidence

I wrote about European math again, just a few days ago, also referencing Michael Pettis. In case you missed it, please consider Problem in Europe is Arithmetic, Not Confidence; Why the Eurozone Cannot Possibly Survive Intact

The current problem most certainly is math, and mathematically "Germany must accept a reversal of the current account imbalances or it must accept an erosion in the value of the Spanish assets it owns as a consequence of the current account imbalances."

Everyone is looking for magic bullets but there are none. One way or another, much pain is coming to Europe, including Germany. Mathematically it must be so.

Root Cause of the Debt Crisis and Trade Imbalances

The root cause of this mess (including the USA's huge trade imbalance with the rest of the world) is twofold.

  • Fractional Reserve Lending
  • Lack of a Gold Standard (Or Other Enforcement Mechanism)

No Better Enforcement Mechanism than Gold

Rather than blaming this mess on the gold standard, one of the reasons for large trade imbalances is precisely because there is not a gold standard.

Most of the problems people assign to the gold standard are not problems with the standard at all, but rather problems associated with fractional reserve lending that allowed more gold to be lent out than there was actual gold.

Bear in mind that Pettis does not support a return to the gold standard. However, Pettis does believe an enforcement mechanism is needed.

For further discussion, please see Michael Pettis Warns of "Virulent Political Turn Against Euro", Adds Clarification to "Gold's Honest Discipline"

Certainly, lack of an enforcement mechanism regarding trade is an enormous problem. Debts pile up forever, with no way to pay them back.

From my point of view, history suggests there is no better enforcement mechanism than gold.

Unfortunately, Mitt Romney believes the solution to the US trade imbalance with China is labeling China a currency manipulator, to which he has promised massive tariffs.

Should Romney do that, a collapse in global trade is likely, just as happened during the Great Depression following passage of the Smoot-Hawley Tariff Act.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List


News for factory,Allied Cash Advance,Photography,Beach Water Park,Educational Leadership,Vacation And Travel,Wedding Dress,Family Vacation Packages,Casino and Gambling,Health Insurance,Best Auto Insurance ( BAF ),Web Hosting Professional,Home Design And Remodeling,Information Property For Home,Wireless TV Networking,Business Plan Guide,Educational Guide,Custom Essay Writing Service,Plumber Service And Repair,Property House,Architectural House Plans,Car Auto Services,Computer service and repair,Computer Networking,Business Planning Strategies,Womens Giving,Healthcare and Medical Jobs,Retail Inkjet Solutions,Online Casino Games,Alcohol Drug Treatment,Web Designers,Apollo Amatuer Night,Public School Performance,Kanza Museum,Cap Inter Entereprises Emploi,Culinary Tourism,Business Traveller,Bridal Expo,Container Atlas Architecture,Culinary Tours - Packages and Travel,Dancing Ink Productions,Defend Automotive Group,Real Finance Group,Business Consulting Services,Home Design Audio,Health Projects International,Health Resources,Health Effects of Alcohol,History of education,Vietnam travel guide,Westland Foundation,Lighting Business,Networking Business Professionals,Housing Decoration,Future Business,Health and Beauty Tips,Hotel Cafe and Restaurant,Enhancing Education,Home Improvement Projects,Political Philosophy,Healthy Grieving Process ,Unique Weddings in New Orleans,Art Plus Science ,Advantage Business Media,Mutual Financial Services,Adventure Travel and Holidays,Alternative Medicine Treatments,Web Design and Marketing,Electronic Payment Solutions,Life Success in Business,Devium Car Interiors,Easy Divers Academy,Water Treatment Process,Software Development Company,MSDS Translation Language,Orion International Technologies,Refreshing Summer Wine Guide,Learn Technical Writing,Health Spa and Resort,Creative Book Publishing,Positive Business Mentality,Charter Healthcare,Discount Hotel Rates,United Industries,Warrior Insurance,County Tourism and Vacations,Wedding Ring Jewelry,Studio Design Decorative,Journalism Careers,Gaming Accessories Computing,Business Strategy Consultant,Cefori Technologies Information,Physics and Astronomy,News Fashion,Business Online,Michigan Apartments,Legal Information Institute,Guide Fashion Shipping,Home Insurance Quotes,Web Design Trends,Musical Instruments and Gear,Travel and Leisure,Importance of Education,Auto Financing Loans,Contractor Business Systems,Business Travel,Importance of Sex Education,Education Classroom,Creative Idea Laboratory,Luxury Paradise Vacations,Healthiest Alcoholic Drinks,Sports Betting,Business Environment,Business Directory,Internet Services,Top Styles,Architecture and Design,Discovery Travel and Tourism,Drug Abuse Treatment,Cheap Auto Financing,Business and Technology,Online Trading,Casino Gambling,Easy Online Shopping,Education Games,Social Media Networks,Online Dating,Luxury Honeymoons,Media and Entertainment,Home Decorating Ideas,Insurance Services,Payday Loans Online,Beechwood Travel Guide,Paradise Garden,Business Trends Consulting,Expert School Consulting,Latest Fashion Trends,Alternative Health Care,Technology Trends In Society,Health Technologies Resources,Island Wedding Services,Network Society,Gambling Experts,Medical Insurance Expert,Home Repair and Remodeling,Sexual Health Services,Education Resources,Automotive Solutions,Michigan Trade Associations,Luxury Fashion and Accessories,Theoretical Physics,Financial Advice,Adult Online Dating (Escorts),Pets Health Insurance,Better Homes and Gardens,Avastone Technologies,Discover Student Loans,Sports Authority,Vitamins and Supplements,Business Systems Online,Food Network Recipes,Business and Government,Smart Legal Strategy,Occupational Health Care,Music Education,Online Dating Tips (Expert),Online Marketing Lexikon,Citizens Council Network,Economics and Finance,Fashion Entertainment News,Luxury Travel Destinations,Online Auto Insurance,Home Improvement Loans,Building Business Foundation,Human Resource Consulting,Educational Media pay day loans
life insurance quotes
Credit Loans (finance)
Foreign Auto Parts
Health and Fitness
Drug abuse effects
Destination hotels and resorts
Professional Financial Marketing
Personal Finance
Computers and Technology
Auto Insurance
Real Estate Property
Computer Graphics Technology
Home Improvement
Arts music schools
Online Education Classes
Hotel and Travel
Security development program
Business auto loans
Medical And Public Health Organizations
Land and Homes
Better Health Kids
Engineered Heating
Trade Finance Services
Switzerland Tourism
Casa Travel
Clothing Accessories
University of Technology
Best Law Schools
Marketing Technology
Vacation Tour and Travel
Insurance Agents and Insurance Brokers
Construction Engineering
Healthy Home Economist
Masters Home Improvement
Michigan Web Design
Personal Online Banking
Health Education Foundation
Travel Pack
Real Estate and Home Ideas
Museum Vacations Travel
Free Statistical Software
Blog Free Statistical
Buying and Selling Real Estate
Educational Play
Big Top Business
Alternative Health
smooth skin
Products and Services
Construction Project Management
Northside Car Service
Online Essay Writing
France Health
Europe Program Modernization
European Travel Destinations
Science and Technology Project
Online Store Marketing
Law Society Consulting
Business Networking Company
Motivation to Study
Metropolitan Hotel
Technological Innovation
EAP Business
Travel Guide and Virtual Tours
The Business Partnership
Accessible Accommodation
Entertainment News
Medicines Agency
Carpet Cleaning
International House
VIP Shop
Online Clothing Shop
Institute Education Religion
Ford Escort Team
Shop Engine Part
Computer Hardware
Medical Career
Paris Construction
Professional Translation
Streaming Wizard
Alcoholism and Drug
Medical Laboratory
Commerce Business
Educational Kids Play
Space Education
Home Repair Volunteer
Fashion Talent
Health and Safety Executive
Play Web Games
Travel and Surfing
Property and Estate Agents
Technology Group Solutions
Student Service Center
Construction Industry
Media Center Computer
Teny Fashion
Home Remodeling Services
Inspector Network
Car Rentals
Leader Dogs
Rise Health Systems
Business Strategy Consultant
Personal Life Coaching
Company Business Coaching
Entertainment News
Physics and Astronomy
Science and Technology
Cheap Vacation Packages
World Business Academy
Planets Project
Travel and Leisure
Prevent Drug Abuse
Education Certified
Play Kids Games
Legal Defense Fund
Real Estate Strategies
Isolation Globale
Insurance Coverage Law
Rock Hotel and Resorts
Medical Insurance
Healthy Mind and Body
Marjahaan Autokatsastus
Free Sports Authority
Auto Insurance Coverage
Global Technics
Advitium Manufacturing
Professional Core Education
Special Finance Services
Bergen County Contractors
Great Children's Art
Health Supply Company
Social Media Power
Texas House Restaurant
Carbon Consultant
Carbon Expert
Low Carbon
Reset Carbon
Healthcare Commissioning
Virtual Job Tryouts
Ethos Academy (Education)
Intrinsic Schools
Attorney General
Technology Software
Business Plans
Digital Media
High School Resources
Adult Resources
Gamblers Anonymous
Ecuador Real Estate
Software Development
Festival Fashion
Drugs And Alcohol
Business Intelligence
Food Network Recipes
Journal Human Resources
Games and Technology
Technology Development
Web Resources Express
Payday Loans Bad Credit
Art and Craft
Business and Finance News
Ecological Sciences
Education Resources
Web Design
Music Education
World Resources Institute
Business Health Guide