Germany and peripheral Eurozone

Véase nuestra entrada sobre Pettis.

Similarly within the Eurozone, it is possible to argue, as Pettis does, that the emergence of German surpluses reflected in part deliberate German domestic policy put in place 1990s – in particular employer and trade union agreements to constrain wages in order to improve competitiveness. This, Pettis suggests, opened a wedge between German and peripheral Eurozone labour costs.

But at least as large a role, indeed I would argue a larger one, should be ascribed to domestic financial developments in countries such as Spain and Ireland, with large current account deficits emerging as the equilibrium result.

• Increasing economic confidence after years of good growth generated expectations of rising incomes and house prices.
• Bank lending supply and household (and corporate) lending demand combined to fuel a credit and asset price boom which was to some extent financed by borrowing from abroad, but primarily by domestic credit and money creation.
• That in turn both increased existing house and commercial real estate and land prices, and stimulated real estate construction booms.
• The construction boom led to rising real wages which left traded sectors of the economies uncompetitive with Germany.
• Rising asset prices drove wealth effects and increased consumption. The combination made large current account deficits the equilibrium result.
• And the fact that the private sectors in surplus countries such as Germany were willing to finance these deficits facilitated yet further credit creation, asset price increases, and unsustainable investment. 24 Again international imbalances and domestic factors combined and interrelated, but with the balance of importance lying in this case, I would argue, with private credit creation in the deficit countries.

Macro-­‐prudential tools focused on domestic bank lenders… reducing their reliance on short-­‐term funding from abroad … complemented by direct constraints on borrowers, particularly in real estate markets, for instance via maximum loan to value or loan to income limits…

Summary: The fundamental cause of the global financial crisis lay in the growth of real economy leverage unrelated to new capital investment, and the rising intensity and complexity of intra-­‐financial system debt claims.

We have too much of the wrong sort of debt.

The most important international factors are a subset, but a particularly important subset, of those rising net and gross debt claims. Large current imbalances and net capital flows in debt form unrelated to capital investment in the receiving country are a major cause of instability. And large two-­‐way gross capital flows exacerbate the dangers.

We have too much of the wrong type of capital flow.

The most important policy measures required, are therefore focussed on the primarily domestic drivers of large current-­‐account imbalances, and on the interface between gross capital flows and domestic credit cycles.

Adair TUrner, Too Much of the Wrong Sort of Capital Flow, enero 2014