Fireworks are going off in Germany again in yet another battle between Wolfgang Schaeuble, Germany’s finance minister, and the ECB.
Schaueble dismissed a suggestion this week by ECB head Mario Draghi that Germany should use fiscal room for manoeuvre to decrease its export surplus.
Reuters reports Germany’s Schaeuble blames ECB for German Export Surplus.
Germany has no plans to reduce its export surplus, Finance Minister Wolfgang Schaeuble said on Friday, as the European Central Bank (ECB) has not changed its monetary policy which has led to a weaker euro which in turn boosts German exports.
“Even before the European Central Bank decided its policies of unusual monetary policy, which also led to the euro exchange rate falling significantly, I said that we will increase German export surplus,” Schaueble told reporters.
“If the surplus in the euro zone as a whole rises by a total of 3.6 percent, one should not be surprised that the German export surplus has also risen, if not by 3.6 percent but by 2 percent,” he said before meeting other European finance ministers.
When asked whether he had any plans to decrease Germany’s export surplus, Schaeuble said: “I haven’t heard that the ECB is changing its monetary policy.”
The Munich-based Ifo economic institute has said Germany’s current account surplus would probably hit a new record of 278 billion euros ($313.28 billion) this year, overtaking that of China again to become the world’s largest.
Resounding No
I take that as a resounding “no” to Draghi’s proposal that Germany should reduce its export surplus.
Target2
No discussion of eurozone problems would be complete without a discussion of Target2, an abomination created by the eurozone founders and one of the fundamental flaws of the euro.
Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the “Club-Med” countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe.
Pater Tenebrarum at the Acting Man blog provides this easy to understand example: “Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been ‘acquired’ is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment.”
Monetary policy can help external balances but it cannot fix internal target2 balances.
I will update the large and growing capital flight numbers soon.
Why the Eurozone Will Destruct
Germany will pay one way or another for the massive imbalances between the creditor and debtor Eurozone countries.
Eventually Spain, Greece, or Italy will realize it is impossible for them to pay back what is owed.
Once that realization sets in, some country will default on their euro-denominated liabilities. Beppe Grillo’s Five Star Movement in Italy is on board with that idea already.
There are only three possible paths at this point.
Three Alternative Paths
- Germany and the creditor nations forgive enough debt for Europe to grow
- Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe
- Breakup of the eurozone
Germany will not allow #1. It is unreasonable to expect #2 to last forever. The only door left open is door #3.
The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences.
Unfortunately, the most likely outcome is still a destructive breakup of the eurozone, starting in Italy or Greece.
Mike “Mish” Shedlock
These 3 paths are not mutually exclusive. The Euro zone could collapse AND nations default on their debts. It is also possible that economic growth and unemployment could be terrible once the Euro zone collapses.
In short, the collapse of the Euro zone is not some panacea that will automatically bestow wealth and prosperity upon all (or anyone at all) once it happens.
It would be reorganisation around national values, those would be reflected in the currencies. That in turn would mean investment would have to be attracted, returning reality closer to demand.
If EU continues from a centralized financial tenet that is able to direct mutualized value indiscriminate of nation, to its own tune, it must first empower itself of all national alternative. There is no other route, just transition, but national identity is multigenerational and very unlikely to accept ‘foreign’ imposition, the easy money having already been spent to boost the initial appearance. I think EU has run out of ‘theme’, now it is only a question if European society accepts the new normal or is intent on making a better go of it under a national banner.
The EU experiment was never based on sound economics. They NEED to break up, so the debtor nations can have a currency that devalues. That is the only way they will EVER adjust and become competitive again.
But the central planners in Brussels won’t hear of this. They are only interested in political power. Like all power hungry sociopaths, they never give up until their heads are under the guillotine.
EU breakup is a certainty, and sooner than many think.
Or Merkel could order a $trillion of Italian sausage fiat cars etc and feed and help the refugees thus rebalancing trade. But refugees are for exploiting as cheap labor not for feeding and helping and most certainly not with goods imported from Southern Europe. Germany is awash in hypocracy. Time for Europe to blame Germany. I feel a song coming on.
HI THERE
THERE IS SOMETHING WRONG AS THE INDEXES FELL
THE FED MUST ACT RAPIDLY QE PRINTING MORE MONEY OTHERWISE INVESTORS WILL VOTE TRUMP IN THE US AND POPULIST PARTIES IN EUROPE
IF I LOSE MONEY ON MY STXX PORTFOLIOI MAY VOTE FOR MARINE LE PEN IF I AM ANGRY IF STXX INDICES GO HIGHER AND I EARN MONEY I WILL VOTE FOR MAINSTREAM PARTIES CUIDADO BE CAREFUL
SEE YOU RIGGED MARKETS
Three Alternative Paths Mish
A fourth path is Steve Keen’s “A Modern Jubilee”.
Dear Mish,
Your are again cherry picking because your are biased.
Why not Portugal? Or Belgium? Why those Southern Countries? Do you have any problem with them?
It seems to me that you are biased and you do not like the Eurozone because they bail out countries. Wait, countries can not bailed out but can banks in the UK and the USA? Or States like Puerto Rico?
Why you do not try to watch what is going on in Greece? They do not like the treatment for theirs diseases and do not implement economic reforms as they should. So who you blame? The doctor instead the patient?
You can argue that their banks are rotten. So, if that true, let them fix or close the banks but it seems the problem is not only the Southerns banks. Look the DB in Germany. It can be saved or not?
You can argue that the ECB QE is not solving the problem, but are you sure? The ECB only is squeezing the liquidity of financial instruments from the market and is only the anticipation of what would will happen naturally when all the Eurozone will have fiscal surpluses.
Dear Mish, have you checked the fall in the Public Debt in the Eurozone?
Have you checked that Germany doesn’t not have a trade surplus with the rest of the Eurozone?
Or you are only cherry picking the data to prove your bias against the Eurozone?
Kind Regards
Trade tends to be relatively balanced with a gold standard. Trade gets so silly because bankers won’t let prices become affordable in exporting countries to entice shoppers to shop. Shoppers love sales.
The situation comes down to bankers confiscating goods with the printing press, then redistributing confiscated goods chaotically. Then bankers demand a bailout, creating further chaos.
There is another alternative Mish. Europe could become the United Country’s of Europe and no longer will countries have any sovereignty at all and the rebalancing of debt will be apart of this union. Germany will no longer have a say when they join the union and rebalancing happens to other countries in the union just like we do in the USA states.
The question in my mind will all the people of Europe finally have a say in election of the new president of the federation. Most likely he/she will be anointed and Europe will continue to be feudal as their kings and queens in Brussels will rule them all.
Many speak of how stupid the Brits are for exiting the EU, maybe they see the writing on the wall.
The EURO: a disaster by design!
The Euro is an ever greater misery in the making. By design this currency is absolutely not sustainable. For 16 years Germany and The Netherlands (D&NL) were able to export unhindered to other Eurozone countries where most of their stuff was bought with borrowed money. Thus the industry of the importing countries (Portugal, Italy, Greece, Spain-PIGS) shrank continuously. The result was rising PIGS unemployment and further strengthening of imports from the German “miracle” and The Netherlands (D&NL).
Greece is merely a small symptom of what is waiting to happen at continental scale. All PIGS countries are nearing bankruptcy while D&NL will see their Eurozone markets shrink because the PIGS capacity to borrow is narrowing and nearing exhaustion. There is nothing stable in the European design. From the Brussels bureaucracy comes a continuous flood of rules while a harmonization of the economic level, especially a PRODUCTIVITY CONVERGENCE had never got the adequate priority. A result in just 16 years the internal free market, instead of integrating, has separated and pushed the individual economies at an even greater distance from each other: more and more money+work went to D&NL, while more and more debt+unemployment went to PIGS. And Brussels maintains a dangerous indifference about this. Their attitude is kind of a power trip: rules first, results later.
But how dramatic and massive the development shortfall of the PIGS may be, there’s an even bigger problem of the “Euro”: the single currency is not European. The Maastricht Treaty prohibits fiat money creation by the ECB. Before the ECB was established, due to the IMF arrangements, no central bank of any of the countries now in the Eurozone had a status of Lender Of Last Resort (LOLR). To circumvent the Maastricht Treaty while widening the money supply, the ECB was forced to give all the new liquidity coverage in US Dollars by means of swaps with the Fed. The fundamental problem of the Euro is that this currency is a Dollar surrogate and the Eurozone is a monetary plantation of the Federal Reserve.
The Eurostat numbers continue to show a growing productivity divergence between D&NL and PIGS.
The Eurozone has 1 currency unit for 19 economies. Can one imagine a car designed to have 19 wheels, each wheel allowed to run at a different speed and not falling to pieces?
Excellently stated
Things are getting too freaking funny here on upside down planet NIRP.
“Germany should use fiscal room for manoeuvre to decrease its export surplus.”
So…the world is fucked up but if we all sit on our hands and do nothing it will get better?
I guess that will be ‘fair’ to the industriousness challenged peoples of the world.
Reminds me of being in South Africa a while back. The people had no jobs and no houses.
It was a conundrum
Maybe some IMF genius has developed a complex diffetential equation to solve it by now.
Current T2 imbalance is around € 1 trillion. Bundesbank provides close to € 700 bn. Bundesbank is in effect financing German export. How much more is Weidmann to land via the T2 system to bankrupt countries and banks?
Last time Draghi panicked, summer of 2012, T2 imbalances were at these levels.
So will it be Angela “we can do this” Merkel or Jens “we can´t do this” Weidmann who will win the argument.
In August alone Italy increased by € 35 bn to € 327 bn.
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