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20 Sep 2013

Germany spurred the global crisis

Stephen King

by Stephen King

HSBC Group Chief Economist

Germany spurred the global crisis (Getty Images/Werner Schnell)

Other European nations have, voluntarily or otherwise, fallen in line with Germany’s economic philosophy

Whoever wins the German election on Sunday, we can be sure of one thing: Germany has already won a famous victory in Europe. Other European nations have, voluntarily or otherwise, fallen in line with Germany’s economic philosophy: hard work, low inflation, improved competitiveness and, ideally, a balance of payments current account surplus. Unfortunately, this essentially mercantilist model is totally inappropriate for an economy the size of Germany, let alone an economy the size of the eurozone.

Mercantilists regard a balance of payments surplus as a sign of strength (therefore a deficit is a weakness). Yet it’s an odd view: surpluses and deficits are merely two sides of the same coin. Any country or region experiencing an “improving” surplus or narrowing deficit must be matched by others experiencing a narrowing surplus or “deteriorating” deficit.

Germany’s surplus has grown steadily larger over the years: from a modest USD40 billion in 2002, it reached a whopping USD248 billion in 2007 and has remained at roughly that level, a reflection not just of Germany’s export success but also its unwillingness to reinvest buoyant export revenues in the German economy. For the first few years, Germany’s rising surplus was recycled into rising deficits in the US and Southern Europe. Its excess savings found their way into American mortgage-backed securities and Southern European government debt, not the wisest investments ever made. Ultimately, Germany’s giant surplus only helped to spur the financial bubble that contributed to the West’s economic downfall.

Still, Germany itself has, so far, emerged from the whole sorry tale looking really rather good. It’s no great surprise, then, that Germany is so keen for its European partners to follow in its footsteps, running current account surpluses or, at a minimum, much smaller deficits.

Ultimately, Germany’s giant surplus only helped to spur the financial bubble that contributed to the West’s economic downfall

They have largely done so. Spain, Italy, Greece, Portugal and Ireland have all seen wrenching declines in their overseas borrowing and the result has been remarkable. The eurozone current account surplus has soared, from a modest USD46 billion in 2007 to a whopping USD221 billion last year. What was once only a massive German surplus is now a massive eurozone surplus.

So who is running an equally massive deficit? Who has had to borrow more to offset the increase in eurozone savings? The brunt of the adjustment has been borne by economies in Asia and across scattered parts of the emerging world. China and Japan have seen earlier big surpluses more or less disappear. India, Indonesia and Brazil have gone into big deficit.

You would be forgiven for thinking this is eminently desirable. Before the financial crisis, Asian nations were just as mercantilist as the Germans, happy to run persistent current account surpluses. Their excess savings increased demand for a whole host of Western assets, contributing to lower interest rates, booming house prices and, in time, the sub-prime crisis.

The “big idea” during the global financial crisis was to offer huge monetary stimulus. However, rather than prompting a decent home-grown economic recovery, a lot of this extra liquidity poured into emerging economies. Investors hunted for the highest yields, and rapid increases in debt allowed emerging nations to boom as the West licked its wounds. Yet the boom only served to mask some serious economic weaknesses: excess credit growth in China, rising labour costs in Brazil, disappointing infrastructure investment in India.

What had been an unwelcome eurozone balance of payments problem is now an unwelcome global one. The German surplus is now the eurozone surplus, the Southern European deficit is now an emerging markets deficit. The ability to fund that deficit, however, is dwindling as the promise of rapid investment-led growth gives way to the reality of a consumer boom, rising labour costs and lost competitiveness. Not surprisingly, currencies are falling, interest rates are going up and economies are stagnating.

In 2005, Ben Bernanke, the Federal Reserve chairman, warned of a “global saving glut”. The players may have changed but the glut hasn’t gone away. For the emerging world, the disruptive effects can already be seen.

Before we conclude that this is a matter only for them, it’s worth remembering that the UK last year ran a deficit of USD86 billion, the second biggest in the entire developed world. With those higher eurozone savings, our economy was never likely to rebalance towards export-led growth. Instead, we’ve ended up borrowing from them to fuel a domestic housing boom. We may have had few other options but, sadly, I am left with a sense of déjà vu.

This article originally appeared in The Times newspaper on 20 September 2013.