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Do capital goods account for the huge German export lead over France?

by marco Tue Jan 23rd, 2007 at 04:06:54 AM EST

from the diaries, with minor edits. -- Jérôme

Responding to a comment by Laurent in last night's Open Thread, oldfrog pointed out that

German export volumes are beating all records, compared to France (I think there was a graph about that on ET not that long ago) despite the fact that both countries are using the same currency.

News to me.  I have not been able to find that graph, but produced two graphs of the nearest thing I could find on EuroStat during lunch:

External balance of goods and services - Constant prices - % of GDP
External balance of goods and services - Current prices - EUR M
(see both below the fold)

And these confirm what oldfrog says.  Oldfrog speculates:

if the Germans succeed in exporting much more than France - despite a high Euro - is because their products are more competitive or maybe more needed than the respective French ones, or because the French don't export the kind of stuff the Germans do.

Maybe some of the economists on ET could explain that for us...


I did some looking around to find an answer, but the best I could come up with was part of an answer in a Le Monde interview with Jean-Pierre Chevènement, who says:

Germany would be mistaken to believe itself immunized against a strong euro, for it has had a virtual monopoly on exports of capital goods [biens d'équipement] since the end of the 19th century.  This is short term thinking, since China is very quickly going to be producing goods at a better price.

Is he right?  Are capital goods the primary if not only reason that Germany is exporting so much compared to France?

Here are the two graphs from EuroStat:

(I couldn't figure out how to set the parameters on EuroStat to have the bars for France and Germany side by side within each time segment, so they the data for each country is presented in a separate block: the block of bars on the left side are for Germany, while the block of bars on the right side are for France. To see the data clearly, it's best to click on the graphs and expand them to full size. Note that each colored block represents a quarter from 2003Q4 through 2006Q3.)

External balance of goods and services - Constant prices - Percentage of GDP - SA

The external balance of goods and services (ESA 1995, 8.68) is the difference between exports of goods and services and imports of goods and services. If positive, the economy exports more goods and services than it imports, and vice versa. Values are seasonally adjusted (SA). The ESA 95 (European System of Accounts) regulation may be referred to for more specific explanations on methodology.

External balance of goods and services - Current prices - Millions of euro - SA

The external balance of goods and services (ESA 1995, 8.68) is the difference between exports of goods and services and imports of goods and services If positive, the economy exports more goods and services than it imports, and vice versa. The share of GDP is calculated on the basis of seasonally adjusted values. The ESA 95 (European System of Accounts) regulation may be referred to for more specific explanations on methodology.

Display:
You might want to make it clearer that those are two graphs each, one for Germany, one for France. I spent a minute trying to figure out what year the big crash happened and why. Or maybe I'm just bad with graphs. Incidentally, given the question, is there a chart just for goods?
by MarekNYC on Tue Jan 23rd, 2007 at 01:04:28 AM EST
Got it.  Sorry about that.  Hope the explanation is clear enough now.

I didn't see a chart just for goods, but I haven't had that much time today to look into it more.

Truth unfolds in time through a communal process.

by marco on Tue Jan 23rd, 2007 at 03:01:06 AM EST
[ Parent ]
Well, it's not exactly a new issue is it? Germany has been Europe's leading exporter for a long time.

Is he right?  Are capital goods the primary if not only reason that Germany is exporting so little compared to France?

Are you sure that's what you mean?

Germany would be mistaken to believe itself immunized against a strong euro, for it has had a virtual monopoly on exports of capital goods [biens d'équipement] since the end of the 19th century.  This is short term thinking, since China is very quickly going to be producing goods at a better price.

True, in part, although not so far. But that's the trigger for a larger discussion, which doesn't answer the question in the diary.

I'd like to ask about the assumptions implicit in the question though. What else is there? Financial goods, service industries. And?

As a meta-note, Jerome a Paris might be doing better than Johan von Berlin in the banking trade, but I don't know how much better, but off hand it's not that much (relative to the figures you're quoting.)

by Metatone (metatone [a|t] gmail (dot) com) on Tue Jan 23rd, 2007 at 03:33:36 AM EST
Is he right?  Are capital goods the primary if not only reason that Germany is exporting so little compared to France?

Are you sure that's what you mean?

Oops.  Corrected now:

Are capital goods the primary if not only reason that Germany is exporting so much compared to France?


Truth unfolds in time through a communal process.
by marco on Tue Jan 23rd, 2007 at 03:42:54 AM EST
[ Parent ]
To compare the two economies, you need to take into account the overall balance of payments.

To simplify, the Germans sell their Mercedeses to the world and then come and spend their money in the French countryside. Tourism is obviously a much bigger bit of the economy in France.

I could not find the numbers right away, but France has a slight surplus of its capital accounts balance, while Germany actually has a deficit - which simply reflects slightly different structures.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 23rd, 2007 at 04:02:31 AM EST
[ Parent ]
France has a slight surplus of its capital accounts balance, while Germany actually has a deficit

So "External balance of goods and services" (Germany: 7.7% of GDP ; France: -2.1% of GDP [for 2006-Q3]) is a totally different beast than "capital accounts balance"?

(I am in dire need of taking Econ 101.)

Truth unfolds in time through a communal process.

by marco on Tue Jan 23rd, 2007 at 04:24:50 AM EST
[ Parent ]
http://en.wikipedia.org/wiki/Balance_of_payments

The number that matters is the change in reserves

Current Account + Capital Account = Change in Official Reserve Account

with Capital account =

Increase in foreign ownership of domestic assets - Increase of domestic ownership of foreign assets

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 23rd, 2007 at 04:57:51 AM EST
[ Parent ]
Thanks, Jerome.

Unfortunately, I think I must still be missing something.

On the map on that page, France appears red ("countries in current account deficit, 2005"), while Germany is in blue ("countries in current account surplus").

And on the List of countries and territories by current account balance list referenced at the bottom of that page, the estimate for Germany's 2005 current account balance is $115,500 million, while France's is -$38,780 million.

A negative current account balance means a negative change in official reserve account, doesn't it?  Otherwise, maybe the Wikipedia estimates are totally off?

Truth unfolds in time through a communal process.

by marco on Tue Jan 23rd, 2007 at 05:18:45 AM EST
[ Parent ]
No, the change in reserves comes from the addition of the current account balance (the one you've been looking at) and the capital account (or financial account) balance, i.e. the balance of investments, whether as sales/purchases of shares, bonds or investments in factories/material assets.

Germany has a large negative capital account balance because they invest a lot more outside of Germany than foreigners invest in Germany. France is the other way round, most years.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 23rd, 2007 at 06:07:27 AM EST
[ Parent ]
Thanks.  I think I am starting to understand.  But I also see I have a hell of a lot to learn.

I encourage you to go shopping more.
by marco on Wed Jan 24th, 2007 at 04:21:05 AM EST
[ Parent ]
Am I wrong if I say that increasing wages in France will worsen even more the trade deficit ?
by balbuz on Tue Jan 23rd, 2007 at 03:46:58 AM EST
Which is funny (in an infuriating way):

French growth is driven by consumer spending (coming both from wage increases and more debt), which drives up (slightly) the trade deficit, and this is worrisome, a sign of loss of competitiveness.

US growth is driven by consumer spending (coming exclusively from icnreased debt), which drives up (massively) the trade deficit, and this is great, a sign of dynamism.

Can someone explain?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 23rd, 2007 at 04:04:52 AM EST
[ Parent ]
Why do you hate freedom?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jan 23rd, 2007 at 04:14:45 AM EST
[ Parent ]
My question was about economics, not politics : When France had the Franc, and trade deficits, the Franc would be devaluated once in a while, and everything would fall right back in place. Not that we have the Euro, what should logically happen - from an economic POV - if France's deficits keep growing ?
by balbuz on Tue Jan 23rd, 2007 at 04:19:38 AM EST
[ Parent ]
As I pointed above, France's capital account is slightly positive, so this is not a problem right now.

But it is indeed a real problem - indeed one that Germany faced in 1999 when it joined the euro at an overvalued rate for the DM: several years of below-par growth as the economy had to "sweat out" the slight overvaluation. But that was pushed to such an extreme that wages did not move at all, while profits increased dramatically. Now German companies are extremely competitive again, but the economy is only benefitting partly.

It's always a fine balance between the need to increase competitiveness and sharing the benefits of this competitiveness, which relax the impetus to increase comeptitiveness, the way the system is rigged now.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 23rd, 2007 at 04:36:30 AM EST
[ Parent ]
The Euro is on the virtuous side of being the Currency-of-Choice.  Everyone - who isn't insane - is diversifying out of their US dollar holdings.

This raises the Purchasing Power of the Euro absolutely as well as relative to the dollar.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Jan 23rd, 2007 at 03:31:40 PM EST
[ Parent ]
from the initial thread:

GDP growth

GDP per capita growth



In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 23rd, 2007 at 04:52:34 AM EST
Do you know where this graph comes from, and why it forecasts that German GDP growth will halve in 2007? Just curious...
by Trond Ove on Tue Jan 23rd, 2007 at 05:30:40 AM EST
[ Parent ]
Not an answer, but still:

Reuters: Germany expects 2007 GDP growth of up to 2.0 pct

STOCKHOLM/BERLIN, Jan 15 (Reuters) - The German government expects Europe's biggest economy to expand by as much as 2.0 percent this year, after growth hit a six-year peak of 2.5 percent in 2006, Economy Minister Michael Glos said on Monday.

Asked during a visit to Stockholm what GDP growth would be in 2007, Glos said: "Between 1.5 percent and 2.0 percent." The forecast compares with an October prediction of 1.4 percent.

"There will be growth, but it will be lower (than 2006)," he said during a visit to the Swedish capital.

A source in Berlin familiar with the government's latest economic report, due to be published at the end of this month, said the 2007 forecast would be fixed at 1.7 percent for budget purposes.

The graph shows a 1% expected growth, which was until recently the expectation of one institute. The government expected 1.4%, the IMF 1.3%, etcetera. But right now it looks like it's going to be around 1.7%.

by nanne (zwaerdenmaecker@gmail.com) on Tue Jan 23rd, 2007 at 06:01:39 AM EST
[ Parent ]
The graphs don't mean that much because they don't differentiate between goods and services. As I understand it, Germany's world leadership in exports (it exports more than either Japan, China or the US) is due to wage moderation, which on the other hand (coupled to the demographic trend) restricts domestic demand and makes its people less happy.

(The comparison is slightly unfair because the exports include intra-EU trade. It might be interesting to compare Germany and California including CA's intra-US balance)

Whether a strong euro will dent this depends on what the euro is strong against. If the Chinese keep the policy of steady appreciation of their currency, then obviously a strong euro (vis a vis the dollar) will not make the difference. Wage levels in China will also be rising, so the difference will have to come from greater improvements in Chinese productivity, branding, product innovation and quality control. I don't know if Germany's edge there will be caught up with so soon.

by nanne (zwaerdenmaecker@gmail.com) on Tue Jan 23rd, 2007 at 05:44:30 AM EST


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