Published in Business Spectator (Melbourne), 8 August 2013
When I grew up, nearly every Sunday was spent playing board games with my parents. Unsurprisingly for a future economist, my personal favourite was Monopoly. It somehow foreshadowed my later dealings with competition policy and property markets. But it also taught me a lesson with relevance to the euro crisis.
I was quite a good player (or at least a better one than my parents) and so I often ended up with an unbeatable collection of streets, railway stations, utilities and hotels. But just winning was not enough to satisfy my ambitions. In order to maximise my play-money, and extend my poor parents’ agony, I granted them generous loans that they could spend on paying me rent. Well, no: I was really begging them to accept these loans. This way, I could drag out the game a bit longer, amass more riches and accumulate greater wealth – or so I thought.
But here comes the rub: At the end of the game, I was not a bit richer than I would have been if we had finished playing earlier. True, my parents now owed me thousands of Monopoly dollars which I had loaned them. However, when they inevitably went bankrupt they could not repay any of these loans. I ended up with the same amount of property wealth and money that I would have had anyway. The loan-financing had really just enabled my parents to have a few effectively free hotel stays with me.
There is a disturbing parallel between the Hartwich family’s board games and today’s euro crisis. One can temporarily maintain an unsustainable situation by providing loans, but one should not bank on being able to recover them.
What I am referring to is Germany’s business model as Europe’s strongest exporter. For many years, Germany has been selling more goods and services to the world than it has imported. The value of German exports last year was €1097 billion, but the country imported only €909 billion. Taken together, this meant a massive trade surplus of €188 billion – or 6.3 percent of GDP. It also means that Germany is building up claims against the rest of world every year with each of these substantial trade surpluses.
In Germany, such healthy export figures are typically regarded as a sign of economic strength, and in a way they certainly are. German cars, machinery, and chemical products are in high demand. Producing and exporting them on a large scale obviously provides jobs, creates economic growth and makes Germans feel good about themselves.
There is only a slight problem, and it is exactly the same problem that I encountered when playing Monopoly with my parents all those years ago. By exporting far more than it imports, Germany is providing loans to other countries. This keeps the German economy humming but it is no guarantee that in the long run this will be a good deal.
Ultimately, it depends on Germany’s trade partners’ ability to repay these loans. If they can’t then Germany will have effectively delivered a large chunk of its exports free of charge. Of course, individual German exporters will have been paid for their products. But some of the money they had received would have been used to finance these exports.
Looking around the eurozone, Germany has one of the largest net international investment positions, as defined by the difference between external financial assets and liabilities. Germany’s NIIP stands at just over +40 per cent of GDP. Conversely, other eurozone economies have strongly negative NIIPs. For France and Italy, for example, they stand around -20 per cent. For Spain and Portugal, they are close to, or beyond, -100 per cent of GDP.
One way to interpret these figures is to understand them as the result of the eurozone’s imbalances. While the periphery economies have lived beyond their means, lost competitiveness and witnessed a deteriorating trade balance, for the euro core countries it is the very opposite. The situation was aided by the fact that european monetary union provided Germany with the advantage of an undervalued currency which did not reflect its true economic strength. With flexible exchange rates, Germany’s currency would have appreciated a long time ago and this would have corrected the trade imbalances.
But crucially, sustaining Europe’s trade imbalances also depended on the euro core’s willingness to finance the euro periphery’s imports – either through ordinary capital exports or through the European Central Bank’s ingenious Target2 mechanism.
As a famous economic wisdom goes, if something cannot go on forever it will stop. And this is the problem with these euro imbalances. At some point in the future, the euro periphery will either have to recover its competitiveness so that it can rebalance its books with the core. Or it will no longer be able to service its external liabilities.
Over the course of the euro crisis, we have witnessed a first haircut in Greece, and we are likely to see a second one later this year. We also know that there are financial institutions in the euro periphery which by all standards are practically insolvent and will need to be wound up. Both will cause losses in core euro countries.
When this happens, the euro core will experience its Monopoly moment. It will then become visible how all these nice trade surpluses over the years were just Pyrrhic victories. Yes, they had delivered export income and provided employment. But in return they had also built up claims positions against other eurozone economies which later turned out to be partially worthless.
It would take a dramatic rethink for Germany’s business leaders and politicians to admit that their exports-driven model contains severe long term risks. But for neither does it make sense to give up the fixation on exports in the short run – not for profitable exporters, and certainly not for politicians concerned about export-dependent jobs. For both, the fiction that Germany’s trade partners will always be able to repay their external debt is vital.
As I discovered playing Monopoly, there is no point dragging out a game artificially. Apart from that, my parents got sick and tired of having to play on just in order to keep my strange business model going for no real purpose.
Perhaps the Greeks and the Spaniards should also tell the Germans that the game is up?
