One camp is a model of financial virtue, and the other systematically messes up. Like any generalization, this is an exaggerated conclusion, but one thing is clear: the euro’s introduction has driven a wedge between North and South. The Germans’ plus was the minus of the Greeks, and that’s how the euro crisis started. Desperate Euro believers, therefore, blame Putin, but that is pure poverty. In 2011, however, American Paul Krugman was the first to point out the deeper internal divide in the eurozone, for which no external party should be blamed.
Krugman published a blog on The New York Times site in which it showed that increased exports from Germany (and the Netherlands) at the expense of the Greeks, Italians, Portuguese and Spanish. Economists speak of a ‘current account balance’ in this respect. That is the export of goods and services minus the import thereof. A country that spends a lot on luxury goods from another country will have to finance those imports with its own exports. The difference between the two is a country’s housekeeping book. A surplus gives a net asset to the rest of the world, a deficit a debt.
Having a surplus, such as the Netherlands, sounds attractive, but it is limited. A huge surplus for one means a deficit for another. If that other country then drowns in debt, it has to be written off, and you have a credit crisis; in essence, that was (or is) the euro crisis.
The Greeks’ position could deteriorate because the European banking system was prepared to cover the deficits, hoping that, for example, the Netherlands would help out if things went wrong. Greece and the other weak brothers received a currency in the form of the euro that was too hard and made their exports too expensive for Germany and the Netherlands. It just goes to show that the introduction of the euro was a blunder, which has still not been adequately corrected.
How would the US fare in that regard? Interestingly enough, the US is to the world what Greece is to Europe, a huge deficit country where holes are mysteriously plugged. The US is in deficit every year of about half a trillion dollars, or five hundred billion. The current account balance is a power supply, as it is called. It reflects a change in the time frame of, say, a year, just like the amount of water that flows through a tap.
Each current variable has a stock variable, that is, a position at a certain moment, resulting from the current quantities’ history. At the tap, this is the bath that is filled after a certain period. The stock quantity associated with the current account balance is the net international investment position (NIIP). That number shows what all the assets of a country are, minus the debts. It is the collection of all businesses, citizens, and governments in one state about the rest of the world. The deficit countries, such as the US and Greece, have to be financed somewhere, and if you borrow money from someone who has another claim against you, a property. It’s that simple.
When the Lehman Brothers fell, the US still had a deficit of $ 1.2 trillion. The most recent figures from the IMF show that this score has increased ten-fold after ten years. At the pace of 2020, the US is building up an external debt greater than it managed to realize in the two centuries before 2008 combined: an apparently unsustainable situation.
The NIIP deteriorated in the quarters following the collapse of Lehman Brothers, and that makes sense. Stock prices collapsed, eliminating ownership and putting the government into debt to save the banks. Most of that money was borrowed abroad. Then the central banks came up with quantitative easing (QE), never to stop.
The wall of money built up in this way allowed the American NIIP to explore further, to ridiculous levels. As a result of the credit crunch, the NIIP fell to about $ 5 trillion to stabilize. The effect of Trump’s tax cut is also clearly visible because since then, the US government has had unprecedented budget deficits, and these are also financed with foreign money.
The largest surplus countries in the world include China, Japan, Germany, and the Netherlands. Traditionally, the American roughly buys his TV in Japan and his car in Germany.
These exporting countries build up a surplus in this way, and they can lend it to the US to finance the budget deficit. Since the war, these three countries have been political and military allies who could fix an excessive US debt position among themselves. However, China is not. This country has been able to trade freely with the US and the EU since joining the WTO and has a steadily increasing trade surplus with both blocs since 2000, of $ 200 billion a year with each.
The difference in exports and imports with the Netherlands is no less than 30 billion euros, to the Netherlands’ detriment. The Chinese hoard that money and then buy European companies and US debt, which greatly benefits their power position. China is now as important a source of capital for the US as Japan and Germany are, but their position is also growing rapidly.
From the first to the second quarter of 2020, the US NIIP fell from negative 12.1 trillion to negative 13 trillion, an $ 883 billion jump in the wrong direction. The optimists in the world don’t mind all that extra debt. During a crisis, you shouldn’t cut back, and the money is there anyway, so what are we making difficult about?
The fact is that the world’s most powerful democracy is increasingly relying on the world’s greatest Communist dictatorship instead of two old military allies who have also become democratic since 1945. That will have significant geopolitical implications over the next decade, whoever becomes the US’s next president.