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Ragin' Contagion: When Debtors Go Broke, So Do Mercantilist Exporters
Submitted by Charles-Hugh-Smith of OfTwoMinds blog,
Papering over the structural imbalances in the Eurozone with bailouts or bail-ins will not resolve the fundamental asymmetries in trade.
Beneath the endless twists and turns of Greece's debt crisis lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.
The key imbalance is between export powerhouse Germany and its trading partners, which run large structural trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain.
Those outside of Europe may be surprised to learn that Germany's exports ($1.5 trillion) are roughly equal to the exports of the U.S. (1.6 trillion), and compare favorably with China's $2.3 trillion in exports, given that Germany's population of 81 million is a mere 6% of China's 1.3 billion and 25% of America's population of 317 million.
German GDP in 2014: $3.82 trillion
Chinese GDP in 2014: $10.36 trillion
U.S. GDP in 2014: $17.42 trillion
Germany's dependence on exports places it in the mercantilist camp, countries that depend heavily on exports for their growth and profits. Other (non-oil-exporting) nations that routinely generate large trade surpluses include China, Taiwan and the Netherlands.
While Germany's exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero. Without strong export growth, Germany's economy would have been at a standstill. The Netherlands is also a big exporter (trade surplus of $33 billion) even though its population is relatively tiny, at only 16 million. The "consumer" countries, on the other hand, run large current-account (trade) deficits and large government deficits. Italy, for instance, runs a structural trade deficit and its total public debt is a whopping 137% of GDP.
Here's the problem when debtor/importer eurozone members such as Greece go broke and default: Who is left standing to buy all the mercantilist exporters' goods? Ultimately, much of those goods were purchased with debt, and when debtor nations default, the credit spigot is turned off: no more borrowing, no more money to buy Dutch, German and Chinese exports.
This chart illustrates the dynamic between mercantilist and consumer nations:

Although the euro was supposed to create efficiencies by removing the costs of multiple currencies, it has had a subtly pernicious disregard for the underlying efficiencies of each eurozone economy.
Though German wages are generous, the German government, industry and labor unions have kept a lid on production costs even as exports leaped. As a result, the cost of labor per unit of output -- the wages required to produce a widget -- rose a mere 5.8% in Germany in the 2000-09 period, while equivalent labor costs in Ireland, Greece, Spain and Italy rose by roughly 30%.
The consequences of these asymmetries in productivity, debt and trade deficits within the eurozone are subtle. In effect, the euro gave mercantilist Germany a structural competitive advantage by locking the importing nations into a currency that makes German goods cheaper than the importers' domestically produced goods.
Put another way: By holding down production costs and becoming more efficient than its eurozone neighbors, Germany engineered a de facto "devaluation" within the eurozone by lowering the labor-per-unit costs of its goods.
The euro has another deceptively harmful consequence: The currency's overall strength enables debtor nations to rapidly expand their borrowing at low rates of interest. In effect, the euro masks the internal weaknesses of debtor nations running unsustainable deficits and those whose economies had become precariously dependent on the housing bubble (Ireland and Spain) for growth and taxes.
Prior to the euro, whenever overconsumption and overborrowing began hindering an importer-consumer economy, the imbalance was corrected by an adjustment in the value of the importer's currency. This currency devaluation would restore the supply-demand and credit-debt balances between mercantilist and consumer nations.
Absent the euro today, the Greek drachma would fall in value versus the German mark, effectively raising the cost of German goods to Greeks, who would then buy fewer German products. Greece's trade deficit would shrink, and lenders would demand higher rates for Greek government bonds, effectively forcing the government to reduce its borrowing and deficit spending.
But now, with all 16 nations locked into a single currency, devaluing currencies to enable a new equilibrium is impossible. And it leaves Germany facing with the unenviable task of bailing out its "customer nations" -- the same ones that exploited the euro's strength to overborrow and overconsume.
On the other side, residents of Greece, Italy, Spain, Portugal and Ireland now face the painful (and ultimately unworkable) effects of government benefit cuts aimed at realigning budgets with the productivity of the underlying national economy.
Either Germany and its export-surplus neighbors continue bailing out the eurozone's importer/debtor consumer nations, or eventually the weaker nations will default or slide into insolvency. Greece is merely the first domino to fall.
Now an inescapable double-bind has emerged for Germany: If Germany lets its weaker neighbors default on their debts, the euro will be harmed, and German exports within Europe will slide. But if Germany becomes the "lender of last resort," then its taxpayers end up footing the bill.
If public and private debt in the troubled nations keeps rising at current rates, it's possible that even mighty Germany may be unable (or unwilling) to fund an essentially endless bailout. That would create pressure within both Germany and the debtor nations to jettison the single currency as a good idea in theory, but ultimately unworkable in a 16-nation bloc as diverse as the eurozone.
Despite endless assurances that the Greek debt crisis is contained, the reality is that the ragin' contagion of debt crises will spread not just to other deeply indebted nations but to the mercantilist economies that depend on selling goods to borrowers. Strip out the borrowing, and you strip out most of the customers for German, Dutch and Chinese goods.
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The EU and Greece is now going to learn the meaning of another three letters.
COD.
CHS gets a lot wrong.
"While Germany's exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero...
Well, fucking duh, when a currency is devalued - which is essentially what happened when they went from the Mark to the Euro - the people who wind up losing purchasing power are the productive citizens of that country. No wonder their consumption flatlined; all the profits were going to the owners/management of the export companies
"... Without strong export growth, Germany's economy would have been at a standstill."
Er, no Charles, because if the purchasing power of Jurgen Sixpack hadn't been diminished by having his currency weakened, German manufacturers would have sold more of their goods domestically
"The euro has another deceptively harmful consequence: The currency's overall strength enables debtor nations to rapidly expand their borrowing at low rates of interest."
That's not the "strength" of the currency, Charles; creditors gambled that if one of the PIIGS couldn't pay, they (the creditors) would be bailed out, either by their own governments or the ECB. And they were right.
There's absolutely no reason why countries cannot share a single currency successfully, IF that currency is not a fiat currency that conflates commercial debt and government liabilities.
Three letter for self finance channel stuffing scheme when money is run out:
S.O.L.
("der'mo iz udachu")
"Er, no Charles, because if the purchasing power of Jurgen Sixpack hadn't been diminished by having his currency weakened, German manufacturers would have sold more of their goods domestically"
Which would have lead to higher inflation, increased salary for Jurgen S. and higher rates. Not good for oligarchs.
He is talking about real wages. Real wages are not higher prices, they are lower prices. Better purchasing power means prices fall, and dimishing purchasing power means prices increase. He is right though, cheaper currency benefits exporters and depreciates consumer wages. In order to reduce cost to foriegn currency, you must sell to them at a discount, by cheapening your own currency. The importer gets a discount, the exporter increases sales, the wages of people are also in a discount against goods, because exporters specialize in goods most of the game. In order to make a discount for exporters you necessarily need to reduce the purchasing power of the rest of the economy.
China is in the same boat, but you can't sell it if they won't buy it and if your customer base is standing in a soup line, your screwed.....
This is all because even the exporters are keynesian.
Off topic:
SHOCKING VIDEO: White victim beaten bloody while mob laughs and taunts
http://www.bizpacreview.com/2015/07/06/shocking-video-white-victim-beate...
No worries, the authorities have assured us that this isn't an act of racism or a hate crime:
Also Off topic:
So the news tells us that today is the 10th Anniversary of the London 7/7 TERRORIST ATTACKS
It also happens to be the 10th Anniversary of the London 7/7 TERRORIST ATTACK EXERCISE DRILLS that occured at the exact same stations and at exactly the same times if you can believe that... which I can't... you know on account of being a conspiracy kook and all. Take it away Wiki...
https://en.wikipedia.org/wiki/7_July_2005_London_bombings
On the day of the bombings Peter Power of Visor Consultants gave interviews on BBC Radio 5 Live and ITV saying that he was working on a crisis management simulation drill, in the City of London, "based on simultaneous bombs going off precisely at the railway stations where it happened this morning", when he heard that an attack was going on in real life. He described this as a coincidence. He also gave an interview to the Manchester Evening News where he spoke of "an exercise involving mock broadcasts when it happened for real".[39] After a few days he dismissed it as a "spooky coincidence" on Canadian TV.[40]
Must watch interview 1 min 27 seconds >>>>> https://www.youtube.com/watch?v=JKvkhe3rqtc
In response to ZerOHead, and also off-topic:
Evidence the 7/7 London Bombing 10 Years Ago Was Orchestrated
http://www.wanttoknow.info/050713londonbombingcoverup
Black attacks black: nobody cares.
Black attacks white: nobody cares unless the white was a "somebody'
White attacks white: nobody cares.
White attacks black: burn down the city.
When will whites turn off NCAA Trayvon knock out ball, NBA and NFL? Dumb whites in the south worship Trayvons playing college ball.
This hate crime was in OH but they worship their Trayvon thugs at Ohio State. Idiot whites.
... "... On the other side, residents of Greece, Italy, Spain, Portugal and Ireland now face the painful (and ultimately unworkable) effects of government benefit cuts aimed at realigning budgets with the productivity of the underlying national economy."
... translation: ... residents of P I I G S are fucked!
All the fiat currencies are "legal tender" because the governments make you use them. They force the peolpe to use them. Clearly they have no actual value so they violate the 5th amendment. So how are they constitutional? simple. A crooked court created from a court packing scheme you've never heard of. Poof. game over. http://www.thetruthaboutthelaw.com/legal-tender-laws-were-forced-on-us-b...
One of these days enough people are going to wake up to the fact that the whole world's basically just been selling eachother their houses at ever increasing prices for the last 20-30 years.
i hope they wake up the the criminality of debt based money created out of thin air, the predatory and usurious loans of the IMF cabal, and the fact that the US was taken over by a small group of psychopaths who trot our military all over the world committing unspeakable acts of terrorism. oh yeah, those same psychopaths also run the world's central banks and the IMF.
It's these pearls of wisdom that keep me coming to CHS articles. Oh look, more lint in my navel, gotta go
There is no silver or gold to be had at ANY price right now.
So if I am a NATION exactly what am I defaulting to?
It better not be "a NOTIONAL amount of monies."
In other words...a return to "Natuonal currencies" in Europe means a return to notional MONEY.
That could SEVERELY depress the price of your "new money."
Navel gazing...yes...but not if your entire NATION is on the verge of STARVATION.
an unspecified number of ding ding dings...
And that's why exporter nations loan money to bankrupt nations:SO THEY CAN BUY THEIR EXPORTER'S EXPORTS.
DUH
Priced in what though?
Call it "te drug dealer Dillemma"...of which their are many.
"What if the money you exchange for PLUNGING PRICE OF COCAINE is worthless?"
I might not even be able to afford the folks who will seek VENGEANGE upon you!
Tale of woe indeed...
Not to worry, dv, if the good folk at zh aren't sure what's happening, what can a world full of denialists know?
I was referring to trade by letters of credit, not briefcases packed with $100 bills.
Before the 21st Century, exporters around the world wanted to get paid for their stuff in US dollars. Reserve currency. Gets a body excited just remembering it.
Today it's back to the 60's
The EU is a lot like the old Politburo Central Planning and the PIIGs get screwed out o fthe whole deal.
DRUG KINGPIN GO BANKRUPT!
PRICED IN EURO
Bernie Sanders, Rand Paul, they're not going to save you America! Not even if either one got elected president. Elections are theater now. You get someone who is gonna kill the FED, kill big bloated government, kill IRS, end war on terrorism and drugs, lets the TBTF banks die, reinstate Glass-Stegall, reform your fucked education system, repair infrastructure, take care of your southern border, etc... and so on and so forth blah blah blah. This is a dream. You lack social cohesion. You lack direction. Most people are not really that intelligent or moral. They live in a dream world. Thinking that vote is gonna change the rotten system. Democracy isn't that hard to manipulate. Most people are suggestible and illogical. The greed of the winners, the apathy of the losers. There are parasites at all levels of society. I doubt most people even really give a shit. Divided and distracted on issues of insignificance. Despondent, apathetic, docile, indifferent, corrupt. Blah blah blah. Just take pleasure in the fact that the U.S and others are about to get Greeced in the not too distant future.
Fundamentally incorrect. The U.S. has its own sovereign currency. It's not locked into a fixed relationship with a symbiote that thinks it is a parasite. The dollar will devalue naturally against other currencies (such as the yuan) as necessary. That will of course raise the costs of gas and "cheap" Chinese manufactured crap, which will encourage more U.S. local production. This is how currency fluctuations are supposed to work.
So... US exports are nearly the same as Germany’s...
and yet...
the valuation of the American stockmarket is out of this world...
guess what direction that will go...
The whole world is mad!!! If I were an exporter I would convert my fiat money to Gold just as fast as practicle.
Money does not flow in circles as economics books teach
instead money flows from the bottom of the pyramid to the top and stays there
in order to keep money flowing someone has to constantly supply it at the bottom
POLITICIANS, HAVE SO INTERFERED WITH NATURAL SELECTION AND MALINVESTED SO MANY AREAS OF THE ECONOMY, IT"S AMAZING IT'S STILL FUNCTIONING.
TWO PARTY SYSTEM IS A FRAUD
SUPREME COURT IS A FRAUD
BANKING IS A FRAUD
STOCK MARKET IS A FRAUD
FREE TRADE IS A FRAUD
VOTING IS A FRAUD
SCHOOL SYSTEM IS A FRAUD
WARS ARE A FRAUD
NEWS IS A FRAUD
NEW AND IMPROVED IS A FRAUD
GMOs
SOAP
TOOTH PAST
CAITLYN JENNER
OBAMA'S BIRTH CIRTIFICATE
AND FOR GODS SAKE HAVE YOU SEEN WHAT THEY DID TO A SLICE OF BREAD?
YOU NEED A PAIR OF WOOD TONGS TO REACH DOWN INSIDE AND GRAB YOUR SLICE IF YOU MISS CATCHING IT WHEN IT POPS.
Capitalists aren't any brighter than government in picking the winners and losers. Worse, Capitalists BUY governments so that they can use other people's money to play their games with. Probably one of the main things reducing government intelligence and efficiency is this little problem known as "regulatory capture" -- i.e., when the interested businesses have purchased the government department responsible for keeping an eye on them, usually for about 1% of what the captive government's friendly, anti-competitive regulations are worth to them.
Big Government and Big Business are two heads of the same vampire hydra.
According to your figures:
German exports as a percentage of GDP: 42%
Chinese exports as percentage of GDP: 22%
American exports as percentage of GDP: 9%
Note that historically, international trade was such a small part of American GNP that until the 1980's it was considered acceptable to ignore it in figuring the former. Of course for us it is IMPORTS, not exports, which have become the problem.
An export-based economy however cannot survive the loss of its external markets. That's what led Japan into "conquer or die" mode after the Great Depression, and forced Hungary and Romania, both heavy exporters of agricultural produce, to ally with the Nazis.
I'd say that by failing to accept some responsibility for the Greek mess, the Germans are cutting their own throats.