Thursday, February 23, 2017

Edward Harrison — Two things you should know about Germany’s budget surplus

So that’s where Europe is headed. First, budgetary discipline will continue to be an anchor principle. Second, getting the budget deficit down or into surplus is a lot easier if you have a trade and current surplus. German Finance Minister Wolfgang Schäuble wants Germany to lead the way on both these scores as a matter of ‘leading by example’. Third, the eurozone is indeed following this example. We can see the numbers; the euro currency area now has a surplus with the rest of the world, where just 6 or seven years ago it had a deficit.
I don’t know how long the EU wants this policy framework to continue. It ism’t clear if this is a ‘ride out the storm’ approach or a permanent policy framework. I believe they want the surpluses to continue indefinitely. But if these surpluses do continue indefinitely, Donald Trump will put Europe in his crosshairs. And we’ll have to see whether he’s all bluster or whether he intends to take action.

Credit Writedowns
Two things you should know about Germany’s budget surplus
Edward Harrison

3 comments:

Dan Lynch said...

But if the EU has a current account surplus, then some other part of the world must have a current account deficit. Like the U.S..

Noah Way said...

The wealth of a few is made of the poverty of many.

Tom Hickey said...

But if the EU has a current account surplus, then some other part of the world must have a current account deficit. Like the U.S..

Right. The current and capital accounts, which must sum to zero as an accounting identity, comprise the record of the balance of payments.

The trade balance is the major portion of the balance of payments. Basically, the current account is about real stuff and the capital account is about financial assets.

The current account records the real terms of trade (imports) whereas the capital account reflects the financial terms of trade (exports).

Net importers receive more real resources than they give up, and net exporters receive more financial assets then they give up.

Net importers have a current account deficit and a capital account surplus, while net exporters have a current account surplus and a capital account deficit.

A capital account deficit means that the country is acquiring foreign liabilities as assets (saving) and a capital account surplus means that a country is increasing financial liabilities to other countries (dissaving).

So from the standpoint of sectoral balances, net importers are dissaving in their currency, which means that they have to increase domestic private borrowing or run fiscal deficits to maintain employment or they will "export" jobs and factories, and net exporters are saving in others currencies, so they can maintain full employment and increase capital goods investment with less domestic private borrowing or running fiscal deficits.

There are tradeoffs involved and therefore opportunity cost.

Bill Mitchell explains the details in the posts on "external economy considerations" that he put up in the course of developing the MMT textbook with Randy Wray.