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February 05, 2018

How big is Germany's external surplus, really?

The size of the German external surpluses (trade and current account) are not just a matter of economic interest, but have become intensely political. For years foreign commentators, and institutions such as the European Commission, the IMF, or most recently the US Treasury department, have accused Germany of running a beggar-thy-neighbour policy or at least of not doing enough to rein in an ever-growing macroeconomic imbalance. Heiner Flassbeck is one of the few prominent German economists who breaks with the domestic consensus that the external surpluses are a sign of the health of the German economy. With Friederike Spieker, Flassbeck recently published a blog post in which they suggest Germany's very large external surpluses are in fact being understated by the German statistical office. If true, this would make the political controversy over the German external surpluses all the more intense.

But not only that. The German statistical office's interpretation of German GDP growth data is that in 2017 growth has been dominated by domestic demand and investment. Flassbeck and Spiecker argue that, if the external surplus is larger than reported as they suspect, then actually the contribution of domestic demand and investment to German growth has been negative. For left-wing economists such as them, this only makes it more urgent to rebalance the German economy so that German workers enjoy more of the fruits of their work - which they don't if they are exported.

Flassbeck and Spiecker base their suspicion on discrepancies between the estimates of the trade surplus by the German statistical office and the Bundesbank. The Bundesbank estimates that the foreign surplus was over €20bn larger, per quarter, in 2017 than in 2016. This is a massive discrepancy when the statistical office claims that the annual net exports, in nominal terms, had actually fallen to under €250bn. The two institutions use different statistical techniques to convert foreign trade prices to domestic currency, which has a noticeable impact in the estimate of the real balance of foreign trade. Flassbeck and Spiecker also lament that the German statistical office is not more forthcoming about the fact that the first estimates of the 2017 foreign surplus have a substantial component of economic forecasting, and are not just the result of statistical compilation. Also, they wish the statistical office were more encouraging of scientific debate about the methodological issues involved in price adjustment of foreign trade.

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February 05, 2018

Macron's first election test

The two by-elections this weekend, in Val-d’Oise et à Belfort, were seen as the first test for Emmanuel Macron. In both constituencies Les Républicains won yesterday in the second round. The interesting case is in Val-d’Oise. There the LREM candidate won last June, but lost out to her opponent from the Republicans this time around. In Belfort the Republican candidate was simply reconfirmed. Laurent Wauquiez and his team celebrated this as a first victory against Emmanuel Macron, and a confirmation of their leadership and direction, according to Le Monde. Participation was low, though, below 30%.

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February 05, 2018

Coeure's endorsement of a fiscal union

Benoît Coeuré has made a number of very good interventions recently, and is one of the few economists in Europe who do not shy away from telling truth to power. He made the point that various stabilisation policies and fiscal rules are all well and good, but the stabilisation of the eurozone requires more than the ESM in the long-run. 

"The euro area needs a fiscal instrument that can help it cope with large shocks without having to rely excessively on the ECB.  Such an instrument would be the third line of defence of our monetary union [in addition to flexible markets and the ESM]. It would support aggregate demand in countries experiencing a crisis, drawing on common funds. It would thereby provide an additional layer of stabilisation that safeguards trust in national policies. EU solidarity would then take on a whole new meaning."

He did not mention how this fiscal instrument would be funded, but for this to be a fiscal instrument with proper stabilisation functions would clearly require a funding capacity that is not reliant on donations from member states - i.e. eurobonds and a separate tax capacity.

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