BSI ECONOMICS FLASH – February 26, 2014
News: In an article published in early January, Olivier Garnier (chief economist at Société Générale), Daniel Gros (director of the Center for European Policy Studies), and Thomas Mayer (economic advisor at Deutsche Bank) discussed the advantages of creating (German) savings funds to manage external imbalances between Germany and the peripheral countries of the eurozone. Why could such a mechanism be applied from Germany to the peripheral countries?
[…in order to ensure better recycling of Germany’s structural current account surplus, we propose the establishment of long-term savings funds in Germany that would invest equity capitalin the periphery of the eurozone and benefit from a German government guarantee. On the one hand, these investments would promote long-term growth in the economies of the periphery. On the other hand, they would offer German savers a more attractive return than the zero interestrate on deposits that German banks are accumulating fruitlessly with the ECB. The state guarantee,which isnecessary to overcomethe riskaversionof German savers, would not increase taxpayers’ exposure to the periphery, since the capital outflows generated by these funds would reduce the Bundesbank’s Target2 credit position.
« Eurozone debt must be converted into capital. »
Looking at the evolution of external positions since the onset of the crisis, we see that it is indeed the « other investments » item (which includes the Target2 position) that has absorbed most of the deterioration in the net external position of peripheral countries (Figure 3). The structure of these external positions reveals the instability of foreign exposures in certain countries. The level of net external debt (which measures the indebtedness of nations excluding the least volatile items) of Spain, Italy, Portugal, and Greece reveals a position that is potentially financially unstable vis-à-vis the outside world (Chart 4). This explains why Italy has experienced capital flight and a very significant fall in its Target2 position, even though its external position is not excessively deteriorated.
Among the peripheral countries, Ireland is a special case: the country has a very negative net external debt, which means that despite the level of its overall net external position (negative), Ireland has a claim on the outside world if certain items are excluded from the calculation. This means that its economy is « sustainably invested » by foreign investors, particularly European ones. In contrast, the Netherlands has a net external debt, while its external position is largely creditor. This is not the case for Germany, which is why the creation of a mechanism to redirect its surpluses to peripheral countries in a sustainable manner is one of the keys to European financial reintegration.
The establishment of savings funds in Germany, as described above, would direct part of its financing capacity towards sustainable investments in peripheral countries. By increasing the share of items involved in this process in the external positions of eurozone countries, the Economic and Monetary Union would be exposed to less potential financial outflows in times of stress. The Target2 positions of national central banks would be less affected, and liquidity shocks would be less acute in countries indebted to their monetary partners.
Clément B.
