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Germany is now suffering from the illogical nature of its own behaviour

Summary:
Last week (August 9, 2019), the British Office of National Statistics (ONS) – GDP first quarterly estimate, UK: April to June 2019 – told us that the UK economy contracted by 0.2 per cent in the June-quarter 2019 after having grown by 0.5 per cent in the March-quarter. The UK Guardian pundits and the Remain cheer squad all screamed Brexit and were heard to be walking around in circles saying “see, we told you so”. Meanwhile (August 7, 2019), not far away (according to the Remain crowd’s much-loved gravity trade models), Germany’s Statistisches Bundesamt (Destatis) press release – Production in June 2019: -1.5% seasonally adjusted on the previous month – told a sorry tale. In annual terms, Germany’s industrial production has contracted by 5.2 per cent. We also learned that Germany is

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Last week (August 9, 2019), the British Office of National Statistics (ONS) – GDP first quarterly estimate, UK: April to June 2019 – told us that the UK economy contracted by 0.2 per cent in the June-quarter 2019 after having grown by 0.5 per cent in the March-quarter. The UK Guardian pundits and the Remain cheer squad all screamed Brexit and were heard to be walking around in circles saying “see, we told you so”. Meanwhile (August 7, 2019), not far away (according to the Remain crowd’s much-loved gravity trade models), Germany’s Statistisches Bundesamt (Destatis) press release – Production in June 2019: -1.5% seasonally adjusted on the previous month – told a sorry tale. In annual terms, Germany’s industrial production has contracted by 5.2 per cent. We also learned that Germany is probably in recession. According to the Remain-logic, that must be Brexit too, n’est-ce pas? Meanwhile, just a bit further south, Italy is in turmoil. Obviously, Brexit uncertainty. I jest of course (well a bit). But in a real sense, this is all tied into Brexit in one way – and it is not the way the Remain camp would like us to believe. In fact, what I have in mind gives more weight to the Leave position and reflects on how intransigent the European Union elites are in dealing with the Member States.

There were rumblings during the withdrawal negotiations about how poorly Michel Barnier acted as the Chief Negotiator for the UK Exiting the European Union.

Some of these rumblings were emotional and reflected on the role the British had played in the liberation of Europe from the Nazis during the Second World War. Surely, some thanks should be given and that Britain had a special relationship with Continental Europe that should be given some weight.

Barnier’s position was intractable and treated Britain as if it was any nation that was outside the European family (dysfunctional though it is).

I don’t buy into the emotional arguments much although I recognise they have historical merit.

For example, Australia has treated Timor-Leste abominably over the territorial disputes over oil reserves – one of the richest nations bullying probably the poorest nations to get our hands on more oil that rightfully belongs to the Timorese.

And we have done that when the people of Timor-Leste took a terrible toll under the Japanese during the Pacific War because they protected our soldiers who were pushing the Japanese back.

Our treatment of Timor-Leste is more disgusting given that historical fact.

But the more dispassionate reason that Barnier’s tactics and the French antagonism to Britain’s desire to exit, expressed via the democratic process, was that they were putting prejudice ahead of common sense.

And Germany, among other European Member States will rue the way that Barnier and his gang have behaved. They will resent the tactics of the French, which seem to reflect the sort of anti-British antagonism that Charles De Gaulle displayed in the 1960s and which prevented Britain from joining the Common Market in the first place.

Trends in German trade

On August 9, 2019, as the British ONS was spreading the GDP gloom, the German Destatis released “Pressrelease #298” – German exports in June 2019: -8.0% on June 2018.

So in two releases in a week from Destatis – covering two aspects of an economy in serious decline.

The second release told us that:

1. Exports were down in value by 0.1 per cent in June 2019 and 8 per cent over the year.

2. Imports were up by 0.5 per cent in June 2019 and down by 4.4 per cent over the year.

When both imports and exports are falling over a 12 month period, one guesses that the economy is in trouble.

The first graph shows the evolution of Germany’s exports and imports as a percent of GDP since the March-quarter 1991 to the March-quarter 2019.

Notable are:

1. The divergence in exports and imports after Germany entered the Eurozone. This was a deliberate strategy based on the suppression of domestic demand (Hartz reforms, etc) and an aggressive export-led growth strategy.

2. The slowdown post GFC in both aggregates as the opportunities within the EMU for export markets declined as a result of the austerity-bias imposed by the EU elites and Germany took time to adjust.

Germany is now suffering from the illogical nature of its own behaviour

The next graph shows the Net Export position since the early 1990s.

The European Union’s regulations (Macroeconomic Imbalance procedure) prohibit sustained external surpluses above 6 per cent.

Germany has been in constant violation of those rules since June 2012 and nothing effective has been done to address it.

Meanwhile, nations such as Greece were brutally forced into continuous Depression by the EU authorities, which tells you a lot about the desirability of being part of this organisation (EU)>

Germany is now suffering from the illogical nature of its own behaviour

Shifting trade patterns

It is clear that Germany’s net exports are in decline somewhat although both export and import growth has slumped in recent times.

I was interested in tracking the way in which Germany’s exports have shifted by destination since joining the Economic and Monetary Union in 2000. In part, this is a clue to what is now going on inside Europe and why the decision by Barnier and his gang to basically ostracise Britain for wanting to leave their cabal is so stupid from an economic perspective.

The following table shows the top 45 export destinations for German exporters in January 2000, January 2008 (just before the GFC) and the most recent observations for May 2019.

The numbers are thousands of euros for each month.

I ranked the nations in each pair of columns by importance of destination.

At the turn of the century, France was the most important export market for Germany, reflecting historical ties and proximity. The USA was second, then the UK, and traditional Common Market partners, Italy, Netherlands, Austria, Belgium and Spain.

The Asian nations, such as China, Taiwan, Korea, Hong Kong, Vietnam etc, were well down in the ranking of top destinations.

By 2008, this pattern was largely unchanged, although China and Russia were growing in importance.

Now, the situation has shifted rather dramatically. The US is the most important export market for Germany, with France declining in importance, and, soon to be overtaken by China. The EU Member States are sliding down the ranking list.

Top 45 German export destinations ranked

Germany is now suffering from the illogical nature of its own behaviour

There has been a massive shift in German export orientation away from the Eurozone Member States.

1. German exports to EMU nations have increased by 97.3 per cent between January 2000 and May 2019. But since January 2008, the increase has been only 11.2 per cent.

2. The increase to non-EMU nations between January 2000 and May 2019 has been 245 per cent. And since January 2008, the increase has been only 60.2 per cent.

3. The increase to the USA and China, together has been 299.7 per cent between January 2000 and May 2019 and since January 2008, 102.7 per cent.

That tells the story.

The next table shows the percentage growth in German exports by destination (top 45) ranked by the order of importance of value (euros) as at May 2019 for three periods: January 2000 to January 2008; Since January 2008, and the last 12 months.

It show that once again the shifts in German export patterns away from the EMU towards the US and Asia (China, Korea, India).

In January 2000,

Growth in German exports by destination, per cent

Germany is now suffering from the illogical nature of its own behaviour

Obviously, in a blog post, I am not going to present dis-aggregated (by item) analysis of these shifting patterns.

But the point is that Germany has become more reliant on the US and China for its on-going export strength and less reliant on the EMU nations over the last decade or so.

In 2000, the US and China, together, accounted for around 12 per cent of total German exports. By 2018, that proportion had risen to around 17 per cent.

And it is that reliance that is causing it grief at the moment in addition to strategic decisions taken by the EU elites in dealing with Britain’s desire to exit the legal arrangements within the EU.

Trade wars and Brexit

It becomes obvious that if China and the US start slowing, then German exports will slow given the way in which Germany is now reliant on those two nations.

But it is not just about the trade dislocation that is occurring at present (to what extent is uncertain).

Germany has bullied the European Union into adopting a more or less permanent austerity bias, which is killing its European markets.

And then think about Barnier and his withdrawal antics.

Remember that Barnier and his gang seemed to overlook is that the UK is the second largest economy in Europe behind Germany. France is third, then Italy by some distance and Spain is next. The other Member State economies are very small in relative terms (Source).

What Barnier was effectively doing was trying to kill the on-going economic relationship with Britain as a sort of ‘make them pay’ revenge strategy for daring to want to leave the neoliberal, corporatist disaster that the EU has become.

On March 21, 2019, the AfD leader Dr Alice Weidel made a rather pointed speech in the German Bundestag. You can see the speech – HERE (it is in German):

Here is a summary of the main points of her speech (not a verbatim translation):

She is critical of the German position on Brexit.

Brexit will be costly for the EU and German taxpayers.

This is not what long-term planning looks like

Due to your negligence, and your failure to help the UK, Out historically good relationship with the UK

What did David Cameron ask for that was so terrible?

Less EU bureaucracy.

But he was banging his head against a brick wall in Brussels.

This was a good opportunity to reform the EU into a leaner organisation.

Instead, Germany decided to gamble with the unity of the EU.

And now 15 billion euros from Britain will soon be taken out of the EU budget.

But bigger will be the cost to the German economy.

The UK is the second biggest economy in the EU as big as the 19 smallest combined.

From an economic perspective, the EU is shrinking not to 27 but to 9 states.

The nonchalance and indifference shown to Britain by Brussels and Berlin given these costs verges on a pathological denial of reality.

The economic ties with Britain are deeper than with any other country.

It is clearly in Germany’s interest for trade and investment flows to continue unhindered.

But, out of blind loyalty, Germany has chosen to follow France, which wants to deny Britain access to the single market and preventing Britain from having access to the European Economic Area, because Paris doesn’t want them to have this access.

That would be one step too far for France – Too much free trade, too much fresh air in the market, too much competition, too much rivalry.

She talked about the most expensive consequence of Brexit being the loss of its minority blocking power in the European Council once Britain has gone.

According to Article 218, Britain are to tbe treated like any other third-state. But this is a partner with whom we have lived together for 40 years, in good times and bad.

Should they really be treated like Paraguay or Papua New Guinea?

What a mockery. Is it any wonder the British see everything Brussels does as acting in bad faith.

Brexit negotiator Barnier is supposed to have confided to friends, I quote, “My mission will have been a success when the terms are so brutal for the British that they prefer to stay in the Union”.

There is a lack of self-reflection on the continent – in Brussels, in Berlin, above all in Paris.

Brexit shows how out of touch Brussels is.

I make it clear here – I do not support the AfD in their political objectives or the values they present to the voters. I am repulsed by many components of their platform.

But some of these observations are robust and point to the intransigence of the EU elites with Michel Barnier leading the charge on the Brexit hostility.

The basic dilemma is this:

1. Britain wants to separate itself from the legal structures of the EU to restore full legislative overeignty. I support that ambition.

Why would a nation want to be restricted by the behests of an organisation? That is a mismatch of scale.

But, then consider the neoliberal nature of that organisation and the reasons for Brexit from the progressive side are compelling.

2. Britain is the second largest economy in Europe and delivers net economic benefits to the other Member States.

3. The majority of the European economies are in lockdown as a result of the austerity bias inflicted on Member State governments by the nonsensical fiscal rules that the Treaties adopted – at Germany’s insistence it must be noted.

4. The EU negotiator on Brexit has adopted such an inflexible position on Brexit, echoing the French aversion to Britain’s position, that the dynamic has been pushed towards a No-deal and severely distorted the political landscape in Britain.

5. But Germany, the largest economy is now caught in the crossfire of its own doing. It has pushed Europe into a state of permanent slow growth and meanwhile reoriented its exports to non-European growth areas (US, Asia).

But it has also gone along with the Barnier-led ambition to screw Britain when it would have been better, from an economic perspective, recognising that Britain just wanted to sever itself from the legal relationship and will have to continue to have an economic relationship with the EU for the EU to grow at all.

6. Barnier and his gang have so badly mishandled the whole affair that they now risk incurring major costs themselves as a consequence, especially, with the US and China trying to kill each other off.

7. German manufacturers will not tolerate this situation for much longer is my guess.

Conclusion

The whole affair demonstrates exactly why Britain should leave the EU.

It is a crazy, neoliberal outfit, almost invariant to reform, that pursues intransigent positions for the sake of it.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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