GDP deflators show Germany a relative loser, long may it continue

A James Alexander post

While still waiting for the 1Q16 official Eurostat NGDP figure for the Euro Area of 19 countries it has been interesting to have a look at the implied deflators for the currency bloc and its constituents. (Ireland, Slovakia, Cyprus and Luxemburg are all hopelessly late delivering GDP figures, and the first two don’t even seem to do it to Eurostat standards for calendar-adjusted data.)

Why look at the implied GDP deflators? They are perhaps the nearest thing we can get to an accurate measure of inflation. They are the difference between the growth rate of two very large numbers, RGDP and NGDP, and therefore theoretically perfect as measures of inflation – you just have to assume that RGDP and NGDP are measured accurately. No small assumption, especially for RGDP.

The various CPI indices by contrast, like the Euro Area HICP, merely measure price changes for baskets of goods and services, not inflation. Paradoxically, the ECB targets the HICP when it should be targeting a GDP deflator, at the very least. It really should be targeting growth in NGDP.

Two things stand out.

Euro Area inflation is nothing like as bad as the headline HICP that the ECB frets about. It is closer to HICP ex-energy, but slightly healthier, and showing an improving trend in inflation. It is not adequate, being still well below the average for the 2002-2007 period, and so not enough to drive a healthy level of NGDP growth, but it is not quite as disastrous as the 0% seen in the headline HICP.

JA EZ Deflator-HCPI_1

As things stand, we see the ECB striving to ignite “inflation” but to a frustratingly low and self-defeating “less than 2%” target, but against the better target they aren’t doing too badly.

The GDP deflators also shows a much more interesting picture of Germany vs the Euro Area average. Just looking at HICP, it seems like there is price inflation harmony between Germany and the Euro Area.

JA EZ Deflator-HCPI_2

But when you look at the GDP deflators a much more interesting picture emerges.  We see the Euro Area average growing almost twice as fast as Germany during the 2000’s, although nothing like a rate to scare any inflation hawks. The non-German Euro Area countries consequently enjoyed high levels of RGDP growth versus Germany, although still to the benefit of “the sick man of Europe”, as Germany struggled to overcome the burden of reunification. We see that rather stealthily Germany became more competitive – even independently of the much vaunted 2004 labour reforms.

JA EZ Deflator-HCPI_3

In the crisis we see a massive switch as both the GDP deflators and nominal growth collapse for the Euro Area as a whole. However, newly competitive Germany is able to take advantage of the nominal growth chaos in the rest of the Euro Area, having got used to much lower trend growth. In 2011, therefore, Germany was blithely happy with the monetary tightening at the massive expense of the rest of the Euro Area.

Over the last four years, since Draghi assumed the Presidency of the ECB, the central bank has managed to wrest monetary policy away from being solely for the benefit of Germany and we now see a gradual loss of competitiveness in Germany versus the Euro Area average. If we had taken the Euro Area ex-Germany, the contrast would have been even more stark.

Some in Germany may be alarmed to see themselves losing competitiveness against the Euro Area average. But they shouldn’t be despondent. It is not an absolute loss, just a relative one. And a relative loss is just part of the price of being good Europeans. Long may it continue.

Update This morning Eurostat did finally release an official figure for Euro Area NGDP growth. First quarter 2016 YoY growth was 3.0%, down slightly from upwardly revised figure of 3.1% in 4Q15. The figure is in line with the 20 year average NGDP growth rate but well below the 4% trend prior to the 2008 crisis. During the seven years 2007-14 NGDP growth averaged just 1%, nearly a decade of misery.

“If it´s summer, this must be Greece”

And we´re on to the seventh chapter of the IMF-Greece-Germany Slapstick:

A truce between Greece’s creditors averts an immediate panic over Greek bankruptcy this summer, yet as officials and onlookers digested the deal, it became apparent that less was agreed than meets the eye.


The deal, struck in the small hours of Wednesday morning at the Eurogroup meeting of eurozone finance ministers in Brussels, broke an impasse between Germany and the International Monetary Fund that was holding up Greece’s bailout funding for this summer.

The main breakthrough, heralded by German Finance Minister Wolfgang Schäuble, is that the IMF agreed in principle to rejoin the Greek bailout effort this year with new loans. In return, Germany and other eurozone countries pledged to restructure Greece’s rescue loans in 2018 “if…needed.” That promise fell short of the IMF’s demand that Europe should decide now how it would relieve Greece’s debt in coming years.

But the IMF’s main negotiator at the talks, European department head Poul Thomsen, stressed at a news conference early Wednesday that the fund isn’t on board just yet. The eurozone still needs to tell the IMF what it is prepared to do in 2018, consenting to a menu of debt-relief measures for later use, he suggested. “We will need to assess the adequacy of the measures, and we will only go ahead if there is an assessment that they are adequate.”

Mr. Schäuble on Wednesday dismissed Mr. Thomsen’s caveats, insisting that new IMF loans were now assured. “He probably was tired then,” Mr. Schäuble told reporters.


Mr. Thomsen on Wednesday hailed the IMF’s main gain: a promise by German-led eurozone creditors to undertake a far-reaching restructuring of Greek debt in 2018. “We welcome that it is now recognized by all stakeholders that Greek debt is unsustainable, and…that Greece will need debt relief to make that debt sustainable,” he said.

However, Germany previously promised the IMF and Greece in 2012 that it would offer debt relief later if needed—only to reject such a move afterward, citing Greece’s failure to implement all of its promised economic overhauls.

The latest debt promise hinges once again on Greece’s ability to complete its side of a tough bailout plan that has proved beyond the political stamina of all Athens governments so far.

Germany´s trick is to make contingent promises, when it knows the conditions will be impossible to meet!

Meanwhile, Greece´s RGDP has acquired a Bell-shaped appearance, capped below at the 1999 level!

Greece_Bell Shaped

These shenanigans remind me of a post from 5 years ago:

The nature of these meetings is that the hallway chatter is always more interesting that the formal program. Part of the reason why is that, particularly when talking to journalists, the businesspeople or politicians tend to regard those conversations as off the record. So I’ll abide by that here. One of the German execs was a consultant, and the other headed what I’ll call a quasi-official German organization.

They were slightly irritated by the pessimism I’d expressed earlier in the day. “Don’t you realize,” one of them said, “that the cost to us (Germany) of bailing out Greece is far less than it cost us to reintegrate East Germany after the wall came down in 1989?”

I almost choked on my croissant. Yes, I replied, I am aware of that. I lived and worked in Berlin as a journalist in the mid 1990s, when that very painful (economically speaking) process was taking place in Germany. But doesn’t that, I said politely, rather beg the question: Germany integrating their brethren, who’d been isolated and impoverished during the cold war, was a dream come true, whatever the cost. Germans, on the other hand paying to bail out Greece is, to average German, rather the opposite of a dream come true, is it not?

He waved me off. No no, he said, it will be taken care of. The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.”
Why Germany needs the euro

Here was my ‘choking on my croissant’ moment number two. Most economists would agree with what my friend at the meeting had said; but he seemed either oblivious (not likely) or simply unconcerned (more likely) with the flip side of what he had just uttered. Italy, to take the third-largest economy in Europe, one with a sizeable and modern industrial base, is stuck with a currency — the euro — which is stronger than the old lira would be under current circumstances. But membership in the euro zone means Italy can’t devalue to bring some relief to its exporters.

I pushed back politely. Look, I said, it’s not Greece I’m worried about. It’s Italy. Third-biggest bond market in the world. Bond spreads this morning again heading over 7%(before the ECB intervened this to push them back down again.) Too big to fail, too big to save. Is the government, even one under a new Prime Minister, going to push through sufficient austerity to avoid a default?

Now the consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.”

And make no mistake – that, in essence, is where the European crisis stands.

It seems it still does!

Some better (economic) news for France, with more to come

A James Alexander post

Last week Eurostat released the 3Q15 RGDP numbers of the Euro Area. The numbers were OK and broadly in line with expectations.

They aren’t that interesting to Market Monetarists, we want to see NGDP numbers. For what it is worth Euro Area RGDP  growth YoY in 3Q15 was up at 1.6% vs 1.5% for the 2Q15. Slightly better news, although it should be remembered that these are very early estimates.

Frustratingly, Eurostat doesn’t release the NGDP  until 10 weeks after the end of the quarter. We only get NGDP numbers for selected European countries. Here there was better news for France, especially.

French RGDP came in line with expectations at 1.2%, up from 1.1%. Small changes on small numbers, I know, but at least heading in the right direction. But French NGDP accelerated to 2.7% YoY dragging up that RGDP.

It looks like the French long-term  RGDP  growth rate has been around 1.5% since 1990 or 1.8% if you include the more volatile, but higher RGDP growth, 1980s. In order to get just the 1.5% real growth, France needs 3.2% NGDP growth. In order to get to the heady heights of 1.8% France has historically had to “endure” (irony alert!) 4.3% NGDP growth.

JA France_1

Market Monetarists suggest a target for expected NGDP Growth of 5% for the US, in line with long-run averages. If France could also cope with 5% NGDP growth, who knows, she might get over 2% RGDP growth. Would 3% inflation be such a disaster? Obviously, if it led to a volatile NGDP growth as seen in the 1980s, maybe not. But target a steady 5% and who knows what RGDP might be able to deliver!

And what additional human happiness might higher RGDP engender, to help ward off greater tragedies. Lars Christensen posted a link to a fascinating piece the other day, testing for a link between NGDP shortfalls and freedom. ECB monetary policy makers and their political masters should take a look. Inflation doesn’t lead to the loss of freedom, but deflation does. What a lot Jean-Claude Trichet has to answer for in trying to prove that French central bankers could be as hysterically anti-inflation as German central bankers. But then France experienced a similar failure in the 1930s, with the most extended Great Depression of any major country. They never seem to learn. Thank you, someone, for Mr Draghi!

For balance, we have also examined German RGDP growth. Over the last 25 years, which includes the unification boom and bust, Germany has averaged just 1.3% average RGDP growth, lower than France. And NGDP growth has only been a tad lower at 3.0%.

JA France_2

Momentum in the last few quarters seems to be with France. We hope it will continue. The good thing about the encouraging trends is that the ECB seems very concerned with low headline inflation and is set to ease policy further. Sadly, by “easing” we only expect more QE for longer, i.e. more pushing water uphill rather than the simpler, more effective and quicker option of just altering the targets.

The first step to really effective easing would be to raise the inflation target and do away with the crushing, dispiriting, and downright counter-productive “close to, but not above 2%” language and adopt flexible inflation targeting or, better still, the ECB should suggest adopting NGDP level targeting and stop chasing such flaky and meaningless numbers as HIPC.

“Bland” Ben

Bernanke´s blogging is still travelling along “side streets”, refusing to go on to the “main street”. What I think everyone is wants from him is a series of monetary policy posts covering his time as Governor and Chairman of the Fed.

Even so, he could have done something much more interesting with his (GSG offshoot) when talking about Germany´s Trade Surplus. It comes out as a boring “senior class lecture”:

Why is Germany’s trade surplus so large? Undoubtedly, Germany makes good products that foreigners want to buy. For that reason, many point to the trade surplus as a sign of economic success. But other countries make good products without running such large surpluses. There are two more important reasons for Germany’s trade surplus.

First, although the euro—the currency that Germany shares with 18 other countries—may (or may not) be at the right level for all 19 euro-zone countries as a group, it is too weak (given German wages and production costs) to be consistent with balanced German trade. In July 2014, the IMF estimated that Germany’s inflation-adjusted exchange rate was undervalued by 5-15 percent (see IMF, p. 20). Since then, the euro has fallen by an additional 20 percent relative to the dollar. The comparatively weak euro is an underappreciated benefit to Germany of its participation in the currency union. If Germany were still using the deutschemark, presumably the DM would be much stronger than the euro is today, reducing the cost advantage of German exports substantially.

Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending, including spending on imports.

For a theoretical underpinning of the argument see here.

For a more lively discussion of “The economic Consequences of Germany ”, see here.

Update? Scott Sumner says “Germany is balanced“. I don´t think that´s correct. “The Economic Consequences of Germany” within the euro system has many of the same implications of Keynes´”Economic Consequences of the Peace”, when Germany was on the “wrong end of the stick”!