Posted by: Dirk | February 5, 2015

Foreign debt reduction requires net exports

Jürger Kaiser has published a paper at the German socialdemocrats’ foundation FES in 2013 in which he takes a closer look at the London Debt Agreement of 1953, in which Germany’ foreign debts were reduced roughly by half. Everybody realized that repayment of foreign debt would only be possible if Germany would have a net export – or current account – surplus:

»Germany’s ability to pay depends not only on the ability of private and governmental debtors to raise the necessary amounts in DM without inflationary consequences, but also on the ability of the national economy to cover the debts out of the current trade surplus. (…) The examination of Germany’s ability to pay requires the investigation of a variety of problems including: (a) Germany’s future production capacity with particular consideration of the production capacity for export goods and the ability to substitute the products currently imported. (b) The possibility of selling German goods abroad. (c) The probable future German trade conditions. (d) The internal fiscal and economic measures in Germany required to ensure an export surplus« (Auswärtiges Amt et al., 1951: 64).

Related to this is Monday’s news about Germany current account surplus as reported by Reuters:

Germany’s current account surplus is likely to have hit a new record of $285 billion (£189.31 billion) in 2014, beating China once more, its Ifo think-tank said on Monday in a report which may fuel criticism that Europe’s biggest economy is not playing its part to reduce global imbalances.

German policy makers should understand that they face two options here to allow other euro zone countries to achieve net exports. The first option is reducing incomes there until other euro zone countries reduce their imports so that they are lower than exports. The second is increasing incomes in Germany through higher wages and more government spending so that German imports rise and this pulls up exports of other euro zone countries to the level of their imports and beyond.

What is not logically consistent is to defend net exports of Germany and complain that other countries that are part of the euro zone cannot repay their debts.

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