Montag, 8. Juni 2009

Down and out for the long term in Germany?

Today, the FT's Wolfgang Münchau published a commentary entitled "Down and out for the long term in Germany".

His central thesis: Deficit countries (US, UK, Spain) will reach a balanced current account in the near future, or possibly turn into surplus countries. This means that surplus countries (Germany, Japan and China) will be forced to reduce their current account surplus to zero or even slide into negative territory.

How will this happen? According to Münchau, there will be a "violent increase in the euro's exchange rate against the US dollar and possibly the pound and other free-floating currencies". For Germany, "this will not end well".

I'm not sure I can follow him here: Yes, Germany's current account surplus has fallen dramatically over the last 6 months, and will probably drop further. However, it is not clear that it will evaporate completely or even turn negative. It may, but it also may not. Even Münchau seems to think that this will only happen due to "violent exchange-rate movements". But is it really inevitable that the dollar and the pound will collapse? Why would they do so? Aren't they already far below PPP by all conventional measures?

Germany has experienced a lot of economic pain over the last 6 months (as has Japan), with GDP dropping much more than in the US. Much of this has yet to register for private households, as employment has barely dropped so far. It will certainly be exceedingly hard to make up that lost ground in the forseeable future. But I fail to see why there needs to be a further dramatic contraction in the near future that will hit specifically Germany due to a much higher euro exchange-rate.


  1. I fail to follow Munchau, too. After all most of Germany's exports are within the eurozone and are not directly effected by exchange rate changes.

  2. He mentions the Eurozone argument and deals with it by saying that there are Eurozone imbalances too and as they come down, so will Germany's unsustainable intra-eurozone surplus.

    He doesn't really explain why he thinks that they will come down. Would have to be either due to lower demand in the Eurozone countries compared to Germany (which is possible, but doesn't square with his argument that Germany will do worse than everybodey else), or to higher mid-term competitiveness in those countries, i.e. significant deflation compared to Germany.

  3. Isn't it simply the case that some european neighbors can not affort their former consumption level anyway? Especially the more higher value products (e.g. the premium cars) from Germany? Let's think about the situation of Greece, Italy, Ireland ...

  4. @FFriend

    Yes, I expect that all of us have to reduce their life quality a bit. But I don't understand why Germany should be hit more than other countries. Premium products will get hurt more than the rest, but then again production machinery might not, as long it enables cost cutting. I think it's pretty hard to make a call here. So, Munchau may be right or dead wrong.

  5. Perhaps just another example of German Angst?
    I'm glad whilst we could lose more than others ...

  6. Latest German export figures are not exactly encouraging (see new post). However, that's talking about things that have already happened.

    According to Münchau, it will get even worse going forward. At least that's how I interpret him.