Exporting/Importing European Nations

The following notes were excerpted from The Fatal Flaws in the Eurozone and What They Mean for You

Germany's exports are roughly equal to that of China ($1.2 trillion) even though Germany's population of 82 million is a mere 6% of China's 1.3 billion. (Germany and China are the world's top exporter nations, while the U.S. trails as a distant third.) Since the inception of the euro, Germany's exports rose an astonishing 65% from 2000 to 2008 while its domestic demand was near zero. Without strong export growth, Germany's economy would have been at a standstill. The Netherlands, which reaped a $33 billion trade surplus from a population of only 16 million residents, is another example of a Eurozone country which runs substantial trade surpluses.

The "consumer" countries, on the other hand, run large current account (trade) deficits and large government deficits. Italy, for instance, has a $55 billion trade deficit and a budget deficit of about $110 billion. Total public debt is a whopping 115.2% of GDP. Spain, with about half the population of Germany, has a $69 billion annual trade deficit and a staggering $151 billion budget deficit; fully 23% of the government's budget is borrowed.

Though German wages are generous, the German government, industry and labor unions 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 2000-2009 period, while equivalent costs in Ireland, Greece, Spain, and Italy rose by roughly 30%. The consequences of these asymmetries in productivity, debt, and deficit spending within the Eurozone are subtle. In effect, the euro gave mercantilist, efficient Germany a structural competitive advantage by locking the importing nations into a currency, making German goods cheaper than domestically produced goods. Put another way, by holding down production costs and becoming more efficient than their Eurozone neighbors, Germany engineered a de facto devaluation of its own products within the Eurozone at the expense of its importing neighbors.

Since Germany depends so heavily on exports to these same neighbors for its national income, it is not immune to a contraction in the importing nations of the E.U. Were Germany to attempt to bail out its own floundering, insolvent banks as well as the ECB (European Central Bank), then a sharp contraction in the E.U. economy might well trigger an “unexpected” ( to most analysts) fiscal and political crisis in Germany. Germany has backed itself onto a supremely precarious ledge by becoming so heavily dependent on exports enabled by its insolvent customer-nations and its own tottering banks.