Those who argue that Germany has profited from the euro, almost always rest their case on Germany’s export surpluses. The euro eliminated exchange rate risks; appreciated less than the Deutschmark would have, and thus doubly aided German exports. But has the euro benefited German exports, and does this mean it benefited Germany?
Between 1998 and 2011, German exports grew by 117%, according to the German Statistical Office. German exports rose most – by 154% – to the rest of the world; by 116% to non-euro EU members; and least of all, 89%, to other eurozone members. In 1998, the eurozone accounted for 45% of all German exports; in 2011 that share had declined to 39%. These trends are continuing. The eurozone for German goods and services remains very important to Germany’s export trade, but it is not the motor of growth. Besides, German exports were performing well under the Deutschmark, and Sweden which is outside the eurozone and thus did not benefit from currency stability within nor from alleged low price exports to other markets, recorded export growth which, proportionately, significantly surpasses German exports growth.
Nonetheless, German exports have grown considerably, and the euro probably benefited, not harmed, German exports. German export growth, however, did not translate into economic growth. According to Eurostat, during 1998-2011 Germany grew at an average annual rate of 1.4%, compared to 1.7% for France, 2% for the Netherlands, 2.8% for Sweden, 2.1% for Britain, and average growth of 1.8% for the EU as whole. Germany also lagged significantly behind the United States at 2.2%. From 1998 to 2011 only Japan, Italy, Portugal and Greece performed worse than Germany. This is not the performance of a euro-winner.
Whilst German industry has enjoyed record export and profit growth, ordinary Germans have not had much economic joy over the past 13 years: as Charles Dumas of Lombard Street Research has demonstrated, despite the drum-beat of propaganda about Germany’s economic strength German real personal disposable income per capita rose by just over 7% from 1998 to 2011, compared to growth of 13% for Spain and around or over 18% for Britain, France, and the US. Except for Italy and Japan, Germany has been lagging behind every other major economy in terms of personal disposable income and consumption. Germany today is a poorer country compared to many EU members than she was in 1998. Real wages and living standards have not risen for most Germans, and Germany’s once enviable welfare, health and pensions system is being dismantled. Germany has in many respects become a low wage economy, with no minimum wage and middle income earners bearing the brunt of a dysfunctional immigration and integration policy, of ongoing bank and sovereign debt bail outs and the country’s worsening demographic problem.
While Germany’s export industries have boomed, the domestic economy has been sluggish. Between 1995 and 2008, Germany saved more than most countries, yet it exhibited the lowest net investment rate of all OECD countries with 76% of aggregate German savings (private, governmental and corporate) invested abroad. Germany experienced massive capital exports in the years before the eurozone crisis – capital that fuelled an unprecedented economic boom in the southern eurozone.
Exports account for roughly 40% of the German economy. So why has Germany’s export boom not lead to higher growth and living standards. Besides wage depression, the key explanation for this apparent paradox, Hans-Werner Sinn of the Ifo-Institute has shown, lies in the deceptively innocuous sounding but perfidious European Central Bank’s TARGET 2 inter-banking payments settlement system for all cross-border trade within the eurozone. Every time money flows from the banks of one euro member country to the banks of another, it does so through the Target system (unless, of course, the money flows across the border as cash in a suitcase). The basic mechanism of this system is simple enough: let’s assume a Spanish company orders fifty low emission state of the art diesel engines from a German manufacturer. The German exporter will deliver the engines, whereupon the Spanish importer will advise his bank to transfer the agreed purchase price. The Spanish bank will effect the transfer through the Spanish Central Bank, which will credit, i.e. enter a liability on its accounts in favour of, the German Bundesbank, which will then credit the sum to the bank of the German exporter. The Spanish importer gets his machines, the German exporter receives his money, but – and this is the astonishing twist of the story – the money never leaves Spain and it never enters Germany. Instead, the Bundesbank receives a TARGET2 claim against the Bank of Spain.
At 30 September 2012 the TARGET2 claims by the Bundesbank against other eurozone central banks reached €700bn. They are expected to approach €800bn by the end of the year – €800bn of German exports paid for by the Bundesbank. The Bundesbank’s TARGET2 credits amount to about two thirds of its entire balance sheet. Through its TARGET2 credits the Bundesbank is credit-financing German exports because Southern Europe never had the money to import German goods on such a scale – a subsidy by the ailing German taxpayer which equally benefits German industry and bails out eurozone countries which receive but cannot pay for German goods
Many commentators including initially the Bundesbank have countered that these are merely accounting numbers in a settlement system. Within the Eurozone, it all balances out to zero. No need to lose sleep over it. This is, to say the least, disingenuous. Let’s assume you lend 100 to your brother, who is having, well, yes, balance of payments difficulties. Within the family we have +100 for one of the members, and -100 for another. Nets out to zero within the group. But that does not make you sleep any better. What if your brother cannot surmount his balance of payments difficulties and simply defaults on paying you back? Purely accounting numbers?!
Germany’s total exports in 2011 were €1.06 trillion. Of those, about €417bn or 39% went to the eurozone. The figures for 2012 will be broadly similar. From January to September 2012 alone the Bundesbank TARGET2 claims rose from €500bn to €700bn, with an expected further rise of nearly €100bn until 2013. This means that of Germany’s eurozone exports in 2012 of, say, €420bn nearly €300bn or over two-thirds have been financed by the Bundesbank which ensures German industry gets its money. For €300bn the Bundesbank could have financed the sale of 16 million VW Golf cars to the German population this year alone. For the total €800bn ‘lent’ to the eurozone so far the Bundesbank could have financed the entire German passenger vehicle market of 43 million cars registered in Germany in 2012.
If the Bundesbank had printed the money and kept the money at home, it would have stimulated domestic demand, whereas the TARGET2 system ensures the Bundesbank functions as an inefficient German sovereign wealth which can invest in one type of asset only: public and private debt in the weaker eurozone countries which allows them to buy German goods they cannot afford and which provide German industry with an additional 25% to 30% export subsidy, which it does not need.
ECB President Draghi-avelli has Germany by the throat. Through the TARGET2 system the ECB is forcing the Bundesbank to underwrite two thirds of Germany’s eurozone exports with public money, and with his unlimited bond buys programme he is allowing bankrupt governments and banks in Southern Europe and France to recycle and socialise their toxic debt via the ECB and by means either of inflation, low interest interests or capitalisation of the ECB with German money.
The euro has benefited German industry, but it is harming Germany. Is expropriating the German saver and will ruin the German taxpayer. And because the system works well for Germany industry, German politicians can tell the German people that all is as well as it can be in the ‘best of all possible worlds.’ The German government and the ECB are presently the gravest danger to the world economy – by propping up a system that is unsustainable.
Dr Gunnar Beck is Reader in EU Law at SOAS, University of London, and a former legal adviser to the European Scrutiny Committee of the House of Commons. He is the author of The Legal Reasoning of the Court of Justice of the EU, which will be published by HART Publishing, Oxford, in December 2012.