Angela Merkel not only didn’t get that handshake from Donald Trump, when she was at the White House to see him a couple of months ago. She was literally paraded as a surplus pariah at a meeting with EU leaders last Thursday. Trump’s diction on trade surpluses “The Germans are bad, very bad” went viral and completely dismissed the fact that European trade treaties with the US have been negotiated as a bloc of EU members.
Apart from the unconventional bullying style, and the break in tradition, has Trump got a point? Singling out Germany and Angela Merkel may not be the finest thing to do, but it brutally uncovers what is so terribly wrong with the EU and its eurozone. A look at the most recent Bundesbank balance sheet release for April is giving us a sense. It is ever expanding for a reason, as all imbalances that have been building up are reflected in those numbers.
When monetary union commenced, the Bundesbank’s balance sheet stood at around 200 billion Euros. In April, its size was almost 8 times that, 1.583 trillion to be exact. If one were to account for this bubble of a balance sheet, coupled with a permanently and massively undervalued Euro, it puts the admirable German growth in perspective. The Bundesbank is basically contributing the lion’s share to the success of German net exports.
It is not because commercial banks are borrowing money from the central bank to accommodate increased loan demand in line with GDP growth. Receivables from banks with regards to monetary operations stood at a mere 95.7 billion Euros. Rather, German banks drown in their own liquidity. As they don’t know what to do with it, their deposits with the Bundesbank have gone from 75 billion to almost 600 billion in the space of 3 years.
The real drivers of that balance sheet growth are to be found elsewhere. Foreign receivable positions are now 10-fold from before the financial crisis, at in excess of 1 trillion Euros. This literally screams heightened credit risk and very potential future paper losses. Then, there is the infamous Target2 balance, or should we say imbalance, of now 843 billion, still going vertical. And then, there is the ECB’s securities purchasing program.
Again in only a 3 year period, the Bundesbank catapulted securities purchases from 50 billion to 421 billion Euros, most of the money having flown into the German Bund market. As pointed out many times in this space, Germany is hardly in need of such monetary stimulus, but the ECB capital key leaves the Bundesbank no choice but to comply and shovel zero or negative yielding government bonds onto its balance sheet.
Publicly, Wolfgang Schäuble decries such effects from Mario Draghi’s policy. Privately, he is probably grateful as the ensuing collapse of interest costs helps him secure and expand his beloved surpluses. But as we all know, you can’t have your cake and eat it too. One Donald Trump has now put his foot down, and Schäuble and Merkel are being all of a sudden caught between a rock and a hard place.
With Trump pointing the finger so visibly, so hard, and so shamelessly, it is getting almost impossible for Germans to either hide behind the EU bloc or explain surpluses away by insinuating that it isn’t their fault. To be sure, the Bundesbank is contractually tied down to play along with Draghi’s manoeuvring, but at the end of the day they fully share the responsibility for these unprecedented dislocations.
The Bank’s chief Jens Weidmann’s name was recently being thrown in the ring for potentially succeeding Mario Draghi at the ECB. This is a great idea to bring some common sense back. Weidmann has been saying the right things about rates being too low and the Euro too weak – presumably music in Trump’s ears. But Draghi’s term only expires in 2019, and as the eurosystem is lingering on, Weidmann would inherit the impossible to fix then.
It is to be hoped that Trump doesn’t overdo it and finally corner Germany too much. German leaders have so far been fully conscious of their post-War responsibilities, played ball with he big boys and occasionally taken it on the chin. What the world doesn’t need to hear however is usually tame Angela all of a sudden revealing a different side of German leadership and thundering along as she did at a party convention over the weekend.
If Germany couldn’t rely on America any longer, then it would have to take destiny into its own hands. Not that this is a grave threat, but it is certainly a break in tradition that puts an ever so slight question mark around Germany’s position within Western alliances. On one hand, it is an attempt to stand up to the big brother who’s turned into a bully overnight. On the other, it is a shot across the bow for other Europeans not to be lured into bashing Germany.
Proliferation of the Trump lingo is in nobody’s interest.
