A few days ago I pinged global trade expert Michael Pettis with my post Germany’s Finance Minister Blames ECB For German Trade Surplus; Why the Eurozone Will Destruct.
His reply was interesting but not at all unexpected. Pettis labeled Wolfgang Schaeuble’s comments “utter lunacy”.
Schaeuble Recap
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.
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.”
Pettis Comments
What utter lunacy. It is one thing to defend the existing surplus by pretending to believe that it was not caused by income distortions at home but rather by foreign laziness, but to say that it is German policy to grow the surplus further is outrageous. Now that they have bankrupted Europe, and developing countries are in trouble, who but the US can possibly be forced into absorbing it?
If the US were ever to decide that it cannot continuing absorbing everyone else’s deficient demand at the expense of becoming more like peripheral Europe, the consequences for Germany (and China and Japan) would be devastating.
Michael
Bankrupt Europe
Some people blame Spain, Italy, Greece and Portugal for self-imposed problems. It’s not all that simple. The Euro and German policies were both managed in a manner guaranteed to create a crisis in peripheral Europe.
Spain did not have a choice in interest rates. Nor did Italy, Portugal or Greece. Fundamental flaws in the Euro exacerbated huge productivity differences.
Greece was allegedly bailed out three times, but there is no way it can ever pay back the hundreds of billions it owes. Each bailout compounded the problems of the previous bailout, but pile on they did.
On top of it all, the Eurozone Target2 Payment System says internal trade imbalances don’t matter, and all sovereign debt is deemed to have zero risk.
Target2 Imbalances
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.”
Target2 is also a measure of capital flight. The Italian banking system is effectively bankrupt, and outflows from Italy have been picking up.
Those needing a further explanation of Target2 may wish to consider Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks “Can You Please Explain Target2?”
Six Largest Target2 Deficit Countries
Four Largest Target2 Creditor Countries
Look closely at the six countries with the highest balances. Only four countries are positive: Germany, Luxembourg, the Netherlands, and Finland.
The six largest deficit countries owe a collective 797.3 billion euros to the four creditor countries. The ECB itself is in hock for another 133.5 billion euros.
Monetary policy can help external balances but it cannot fix internal target2 balances.
Every county in the Eurozone is stuck with the Euro and the ECB’s interest rates whether it makes any sense or not (and it doesn’t). Rates suitable for Germany were not suitable for Spain, Ireland, Greece, and many other countries. An enormous property bubble in Spain and Ireland was the result.
Italy Target2 Soars to €327 Billion
The above numbers are the most current posted on the ECB’s website, updated September 1 (for the period ending July 31). They are not current. I presume on purpose.
On September 7, ZeroHedge posted Italy Funding Panic? Target2 Liabilities Unexpectedly Soar To Record High
Bank of Italy’s liabilities toward other eurozone nation soared by €35 billion in August, just shy of the biggest monthly increase on record, and reached an all time high of €327 billion, surpassing the previous records set in 2012, just prior to Draghi’s infamous “whatever it takes” speech.
In July, the Bank of Italy said that the recent increase in its Target 2 position was driven by foreigners selling Italian assets, especially bonds, and Italians buying foreign assets, movements which were only partially offset by Italian banks raising more funds on international markets.
In August this trend accelerated dramatically, prompting questions just how dire is the true state of Italy’s banks.
Capital Controls in Italy? Depositor Bail-Ins?
Prime minister Matteo Renzi is desperate to come up with a solution other than a bail-in of depositors, but schemes to date have been laughable.
There are several hundred billion in nonperforming loans at Italian banks on top of all the above messes we have been discussing.
I expect capital controls or depositor bail-ins at some point. With that, let’s return to Schaueble.
Wolfgang Schaueble Statements
Schaueble also stated “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.
Germany cannot possibly collect on what it is owed, in undiluted euros, but it seeks even bigger surpluses.
As I have noted before, 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 a destructive breakup of the eurozone, starting in Italy or Greece.
Mike “Mish” Shedlock
I feel like I am watching some B movie zombie horror flick, where the ‘deceased’ just won’t die and keeps coming back! I seems like I have been sitting with my fingers in my ears waiting for the blast FOREVER.
My conclusion is that Jim Grant’s strategy of trying to outlive the perpetrators is the only thing left for me to do!
Thanks, as always for your efforts MISH.
Agree with the outliving it all strategy. I’m too old to earn it all back if I go into equities and lose when they ultimately collapse by a large percentage.
The current economic theory that supports low and negative rates has an identical parallel with yesterday’s news that a couple of decades ago the sugar industry bought off some experts who wrote a study that said fat was bad and sugar was good. The entire medical and dietary profession believed it and many still do. (FYI, my triglycerides dropped like a stone after I changed from a low fat to a low carb diet, paying close attention to the glycemic load of foods I ate. Triglycerides are fat in the blood and are a function of sugars eaten. Nobody has yet proven that cholesterol causes heart disease or that eating saturated fat causes high cholesterol. Yet sugar is your friend, not to mention that the definition of ‘high cholesterol’ had decreased as time has passed. You can’t trust anybody.)
It took decades for the fraud to be public knowledge and it will take perhaps another decade for it to matter.
I have absolutely no doubt that a similar revelation will occur someday regarding the idiotic ideas that support today’s idiotic theories about low rates being good. The fraud is obvious, yet people are sheep and politicians are owned and/or oblivious.
I have no issues with the German. He is pro Germany, as he should be. The idiots in south Europe deserve what they get if they remain in the Eurozone. The handouts are over, except for the ECB and the gift of debt monetization and artificially low rates.
Another excellent piece by Mish. There is no focus at all on Target 2 among European analysts, commentators, bureaucrats. The emperor is naked but no one dares say the words. Target 2 imbalances is now back to 2012 levels when Draghi panicked. Will Bundesbank and Jens Weidmann allow that the imbalances exceed € 1 000 bn? This is unsecured lending between central banks and the funds end up in insolvent Italian and Spanish banks to fund them and their NPL portfolios. And there is absolutely no way there will be capital flows into Italy which will reverse this development.
This is the elephant in the room.
Dear Mike,
Concerning this:
“Now that they have bankrupted Europe, and developing countries are in trouble, who but the US can possibly be forced into absorbing it?”
I will remember you how your bias will not help the Americans.
The Eurozone will remember to you and others:
“is our currency, but your problem.”
Now you can censure this notice but will not hide the American problem. The Eurozone is replacing the USA as the Western Economic Leadership.
Kind Regards
Spot on Mish.
Germany has and is profiting the most from the Euro. They get to use the same unit of measure as all the rest of the EMU countries and none of the other EMU countries have this advantage as they were and are still basket cases. If Germany was still using the DM for currency they would not be enjoying this surplus. Their currency would be the strongest in Europe.
As many naysayers back in the day when Europe was implementing the Euro without a balancing mechanism countries in the currency would be screwed and wallah it has come to pass. Of course the naysayers were demonized and character assassinations make the USA look like a amateur.
‘deficient demand’ …. why do you keep asking Pettis, who can only come up with the usual keynesian silliness of an output glut, as if too much production was a bad thing. Germany is producing too much, so we have to boost agreggate demand elsewhere! … What a load of rubbish. A million thanks to Henry Hazlitt for his immortal debunking of this nonsense! (“The failure of the ‘New Economics’ “)
Yup, nailed it. Just another Keynesian at the end of the day. None of the problems are ‘Keynesian’ (just the result of poor policy, ahem) but all the solutions are.
Eventually the Germans will own or at least be owed …all of Europe.
Gotta admit it’s a lot less messy than the last time they took a crack at it.
Do you think they could collect without tanks.
It seems the Germans designed this imbalance, but the Club Med nations walked into the trap with eyes wide open and simply did’nt care as long as the good times kept rolling.
That which cannot be repaid will not be repaid. In the end, I see Germany and a group of Nordic cousins facing a stark choice– massive {trillions} debt forgiveness or forming an EU2.0 in Northern Europe. Easy Choice. Long Live the EurMark.
“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.”
I don’t understand this. Let’s say I own a BMW dealership in Madrid. I buy 20 beamers for 1 million euros. I borrow the money from a bank and remit it to BMW. It seems that a private party in Germany (BMW) has acquired 1 million euros of Spanish capital.
Now we just have a trail of debt: my bank borrows the money from the Spanish central bank and maybe the Spanish central bank borrows the money from the ECB. I’m not sure what Target 2 has to do with this. Does the Spanish CB never have to pay back the ECB?
“Does the Spanish CB never have to pay back the ECB?”
It seems, per Lars’ comment above, that the lending is entirely unsecured.
So, in essence, Germans at BMW did all the work to develop, market and build 20 cars. While a Spanish guy printed up some paper notes. And the the two efforts were traded as if representing equal value. Hardly a recipe for long lasting unity and prosperity.
The way Target2 works is the central bank effectively guaranteed the transaction. What do you think happens if Spain or Italy leaves the Eurozone. They will not be paid back fully in Euros
It would of course be the ECB that was owed the Target2 balances from by exiting states that may then default. The ECB would have to be recapitlized, a step perhaps facilitated by it creating enough new Euros to save itself, the inflationary effects (and Bundesbank opposition) notwithstanding.
DEAR SIR
A BREAK UP OF THE EUROZONE IS IMPOSSIBLE BECAUSE IT WOULD MEAN A BREAK UP OF THE EUROPEAN UNION ITSELF
YOU MAY BE RIGHT IF YOUR REASONING TAKES INTO ACCOUNT ECONOMICS FACTS / DATAS ONLY BUT IT IS ONLY HALF OF THE PROBLEM THERE IS A POLITICAL ISSUE UNDERLYING
THE EUROZONE AND THE EUROPEAN UNION INSTITUTIONS ARE 2 FACES OF THE SAME PROBLEM IT IS LIKE A PUZZLE AND THE CORE / CENTER IS GERMANY THE MOST POWERFUL NATION IN EUROPE FINANCIALLY AND INDUSTRIALLY SO SHOULD YOU TOUCH TO GERMANY AND THE ENTIRE UNION WOULD COLLAPSE
Stephane,
The Eurozone / European Union is a failure as currently designed and implemented. Had it been a ‘free trade zone’ or a means to travel without passports, it would be an amazing success. Instead, it’s where bad economic theories get forced down citizen’s throats and economic inequities are built in. It’s really a shadow government that wants control and has no concept of personal prosperity. It’s greatest gift is the assimilation of money printing and interest rate domination into day to day life. At least until it stops.
YOU STATED THE BEST MOVE WOULD BE FOR GERMANY TO LEAVE THE EUROZONE
WIR SAGEN NEIN / WE SAY NO
WIOULD CALIFORNIA WITH ALL ITS HI TECH SILLICON VALLEY START UPS LEAVE THE USA / WOULD TEXAS WITH ITS OIL ON SHORE LEAVE THE US / WOULD NYC AND WALL STREET INDUSTRY LEAVE WASHINTON DC AND MAINSTREET US ANSWER NO ABSOLUTELY THEY MUST REMAIN UNITED IN ORDER TO SUPPORT STATES LIKE OKLAHOMA ALABAMA OR WYOMING…
Stephane,
Typing in all capital letters is perceived as screaming on the Internet. It is poor form.
In 1861 a number of southern states in the U.S. left the union. The federal government used military force to crush the southern states into submission.
You point is sound to the extent that Germany is willing to disburse its wealth to suppot states like Greece, Italy, etc.. Do Germans really see the EU as so much a part of their salvation that they will readily sacrifice themselves to see it preserved? AfD seems to say “no” and when confronted with the question, many Germans may agree I suspect.
The Eurozone will self destruct “again?”
When?
It will be amazing when it happens. It makes me wonder. In 500 years when computers become so sophisticated you can enter entire lifetimes just like you can play Sims games now, will there be visits to when the world economy exploded … cause and effect? Like the future History Channel? This’ll be the big one when it goes off. I wonder if anyone will be lined up against the wall or if TBTF will work another time? Or, what follows?
I can’t question any of the analysis. But what can one realistically expect Schauble to say? He’s got a welfare state to run after all.
“If the US were ever to decide that it cannot continuing absorbing everyone else’s deficient demand at the expense of becoming more like peripheral Europe…”
Zero Hedge: “Tent Cities Full Of Homeless People Are Booming In Cities All Over America As Poverty Spikes”
Seems that is already happening in the U.S. Los Angeles government is trying to come up with money to deal with the problem. In Santa Ana, homeless have been camping out near the city hall, prompting the city take over a building to use as a homeless shelter.
How is this happening when the economy is supposed to be fundamentally sound? This is something that crops up during a recession.
Anyone saying economy is not doing well is “peddling fiction” … well, so says the parrot on the shoulder of POTUS …
“Unfortunately, the most likely outcome is a destructive breakup of the eurozone, starting in Italy or Greece.”
Only a matter of time.
My only question is who will blow up first? … Europe? China?
Couldn’t decide … so i boxed the exacta …
“Germany has no plans to reduce its export surplus, Finance Minister Wolfgang Schaeuble said on Friday”
Is German export surplus under German control?
Given decades of consistent export surpluses, I would say yes.
That is my question too. Germany splitting from the EU would make next to no difference in the export “surplus” the other EU countries are kvetching about. The EU is designed to be unproductive, basically it was an elaborate scheme to avoid making structural changes. Nobody wants to follow the lead of the productive, they instead want to handicap the productive.
So will we hear from you about China’s order for 6,800 planes?
The only thing we need to know is when. I’ll stand in line for that one as we see more and more extend and pretend games.