From US Trust, today:
EUROPE’S “STINGY SIX” RISK GOING UP IN FLAMES WITH THEIR NEIGHBORS
If your neighborhood was on fire, and your house was the only one left standing with running water, you
would probably frantically spray and pump as much water around the place to keep your own home from
going up in flames. Saving yourself would be akin to saving others—a rational response given the
circumstances.
But don’t tell that to Germany, Switzerland, the Netherlands, Denmark, Norway and Sweden. These six
nations are sitting on billions of dollars of savings, but rather than pump this excess capital to their debtladen
neighbors engulfed in one of the worst financial crises in modern European history, the “stingy six”
seem bent on watching the entire neighborhood (Europe) go up in flames.
Granted, it’s going to take more than a massive capital infusion to stamp out the great financial crisis of
Europe. And yes, Germany has hosed plenty of capital around Europe since the crisis began. But that
said, it is still discouraging to see the “stingy six,” with an aggregate current account surplus in excess of
$500 billion, sit on their massive savings while more and more smoke emits from the neighborhood. In
2011 alone, the current account surplus of this cohort rose nearly 17%, to $507 billion; since 2000, the
surplus of the “stingy six” has increased more than tenfold (Exhibit 4).
Exhibit 4: The Current Account Surplus of
the Stingy Six.*
(Billions of U.S. $)
Sources: Organisation for Economic Co-operation and
Development (OECD); IMF.
Data as of June 1, 2012.
*Denmark, Germany, Netherlands, Norway, Sweden and
Switzerland.
Germany’s current account surplus of $202 billion (a measure of a nation’s aggregate savings) is even
larger than China’s ($197 billion). Against this backdrop, is it any wonder China has been reluctant to
write a blank check to Europe’s debtor nations?
Switzerland’s surplus (roughly $95 billion at last count) is nearly as large as Japan’s; but where Japan’s
surplus hovers around 1.6% of GDP, Switzerland’s surplus is in excess of 13% of GDP. Norway’s surplus
as a percent of GDP is just as staggering—nearly 14% of GDP at the end of last year. Sweden’s surplus
of $39 billion was over 7% of GDP at the end of 2011; the same is true for the Netherlands, whose
surplus of $76.4 billion is larger than filthy-rich Singapore. Finally, Denmark has some nearly $20 billion
stuffed under the mattress, in excess of 5% of GDP (Exhibit 5).
Exhibit 5: Current Account Surplus.
(Percent of GDP)
Sources: OECD; IMF.
Data as of June 1, 2012.
All of the above suggests that Europe need not go bankrupt and is not devoid of capital. Indeed, the euro
zone is less indebted than America, with the former’s public debt 87% of GDP compared with over 100%
in the United States.
But parts of the continent will turn into smoldering ash if the “stingy six” refuse to find a creative way to
recycle their savings into the capital-starved areas of Europe. On an aggregate basis, Europe has plenty
of seed money for a Eurobond market or enough capital to effectively launch a better-capitalized
European Stability Mechanism. The surplus of the “stingy six” could also be leveraged to create a eurowide
deposit guarantee plan which would help prevent a run on banks in weaker euro zone members.
Even if it was nothing more than a high-stakes bluff, the “stingy six” should be more vocal about using
their excess savings to shore up confidence in Europe’s weaker parts, a strategy that would help dial
back rising levels of panic.
If Italy, Spain, Portugal, Ireland and Greece are condemned to a brutal period of deleveraging and
austerity, and are forced to save, then it’s incumbent on those with surplus savings to spend, helping to
counterbalance austerity on one part of Europe with consumption in another part. Germany, to the
contrary, is committed to a path of fiscal consolidation at precisely the moment when Europe’s largest
economy should be spending.
Countercyclical spending for the “stingy six” is not only important for Europe. It is increasingly imperative
for a global economy on the cusp of a synchronized downturn that is gathering momentum. Europe’s
financial crisis threatens to undermine U.S. export growth and crimp the earnings of many U.S.
multinationals. To this point, America’s trade deficit with Germany soared 20% in the first quarter of this
year from a year ago. Meanwhile, note the following from Exhibit 6: Of total U.S. foreign affiliate earnings
(a proxy for global earnings), Europe accounts for roughly half of the total. As Europe goes, so goes U.S.
foreign earnings. And speaking of the latter, according to the latest figures from the U.S. government, net
foreign profits of U.S. corporations declined 4.1% in the first quarter of this year from the same period a
year ago, with Europe accounting for the bulk of the weakness.
In the end, corporate America is in the cross hairs of Europe’s recession. The same is true for China,
India, Brazil and many other developing nations dependent on Europe for export growth and trade
finance, which have wilted over the past few quarters, resulting in weaker-than-expected growth across
the emerging market universe and a marked deceleration in global growth over the past few quarters.
Is there a silver lining to all of the above?
Perhaps. Europe’s slow-motion train wreck, a dismal U.S. jobs report, weaker-than-expected growth from
India and continued soft data from China—all of these worrisome data points suggest more action and
urgency on the part of policymakers around the world, and action that goes beyond the usual fix: more
central bank easing. The post-Lehman economic recovery was underpinned in part by synchronized
fiscal pump priming, with China, Europe and the United States in the lead. The moves helped restore
confidence, engender real growth and push global equities higher.
In all probability, we are about to see another global Lehman-like fiscal response from policymakers. In
China, that means more state-directed spending on infrastructure and pro-consumption programs; in the
United States, it means (hopefully) action sooner rather than later on the fiscal cliff; and in Europe, it
means…well, we’ll see. The “stingy six” need to step up, and fast. Until they do, the flight to safety (U.S.
Treasuries, U.K. gilts and German bunds) will continue, as will the flight from global equities. |
