Thread by @jsuedekum

The current account is baaaack in the headlines! Official data by @BEA_News reports that the US has a roughly balanced current account with the EU, even a slight surplus of $14 bn. Does this mean we can be relaxed in the upcoming storms that may lead to a trade war? /LongThread

The BEA data existed for a long time.
( bea.gov/iTable/iTable.… )

But it was somehow under the radar of many economists, me included.
@GFelbermayr and @MartinBraml unearthed in Germany and wrote a report @CESifoGroup /2

econpol.eu/publications/p…

This triggered a series of media reports in all major German newspapers. Among the first, if not the first, to mention it was a joint piece that I wrote with @GFelbermayr for @handelsblatt . /3 handelsblatt.com/meinung/gastbe…

It was picked up a lot. Even Angela Merkel noticed the result and released a statement “If services are included in the trade balance, then the U.S. runs a big surplus with Europe.” /4

reuters.com/article/us-usa…

The US-EU numbers, in short, show that the US has a huge deficit in goods trade (150bn). But it has a surplus in services (50 bn) and in the primary income balance (100 bn). Once you add this up, we arrive almost at zero (forget about secondary income). /5

Angela Merkels statement is, strictly speaking, is wrong because it’s not enough to just take into account services. The primary income balance is key, as noted immediately by the great economist and current account nerd @BradSetser /6

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But the pattern in clear: Europe is exporting goods like crazy. But the US exports services (mainly financial and tourism). Moreover, it has this magic ability to earn more on its stock of foreign assets than to pay interest on its foreign liabilities. Also vis-à-vis Europe /7

These numbers reflect the “dollar privilege”: Foreigners hold mainly low-yield US assets like government bonds, but American hold high-yield foreign equity big time. That’s also true vis-à-vis Europe. /8

Given this evidence, one view in Europe now seems to be: Look, @realDonaldTrump , leave us alone with your tariffs and your trade war. Once you calculate correctly, the EU-US current account is balanced. So would you please shut up? Go mess with China, but not with us. /9

Now, a major problem is that the numbers aren’t all that clear. In an ideal world, the surplus of country A with country B should be equal to the deficit of B with A. That’s true for the overall current account, and for its sub-balances (goods, services, income). /10

Turns out things are not so easy. Eurostat publishes similar data like BEA. They look vastly different. Here, EU has a bilateral CA surplus with the US in the ballpark of €150 bn. That’s a major discrepancy! The great German economist and data nerd @KeineWunder spotted it /11

Other people like @BradSetser noted it, too. He points out that, at some point, both the EU and the US claimed to be a net service exporter to one another. See the discussion in this thread:

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/12

Also @EU_Eurostat is aware of the statistical discrepancies and has promised to collaborate with @BEA_News to resolve it. That’s a great move and really appreciable. Thank you! /13

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So, is this whole thing just a hoax? If the Eurostat data is right, then there is a surplus and we do have a problem with Donald Trump and his fetish view that running a deficit is bad, very bad. So which is it? /14

We need to wait for the final agreement on the data before we know for sure. But I would like to make a couple of comments (from now on the thread becomes more “personal”) /15

First, I tend to believe the BEA data more at this point in time. The BEA is a statistical agency just for one country, and probably has a somewhat easier job than Eurostat which has to combine data from so many other agencies and countries. /16

Moreover, from a political economy point of view, an American agency certainly has no incentive to downsize American deficits at this very moment because that’s not what the #VSG wants to hear. Note: I am not implying anything here. The BEA is doing a great job. /17

Ultimately, it’s not about whether BEA or EUROSTAT is “right”. The truth is probably somewhere in between. Maybe EU runs a CA surplus with the US. But it’s nowhere near the $150 bn surplus in goods trade, because the US is in fact a net service exporter and income recipient. /18

The EU should certainly not sit back and relax, and start regarding CA imbalances as a non-issue. It’s comforting that America has strong stakes in Europe, which would be at risk in a potential trade war. This puts the EU in a stronger position than China. /19

But that’s it. We should not take this evidence as an indication that Europe doesn’t need to address its overall CA surplus, doesn’t need to foster investment, etc. All of this does NOT follow from the observation that the US-EU current account may be smaller or even balanced /20

Finally on Germany: According to BEA, Germany has a bilateral CA surplus of $64 bn with the US. It consists mainly of a surplus in goods trade ($64 bn), whereas the German deficit in services (- $3bn) and primary inc. (-$5 bn) are small and offset by sec. income (+ $9bn). /21

The numbers from @bundesbank are quite in line with @BEA_news. So there is much less of a statistical discrepancy in the bilateral relationship between Germany and the United States. /22

bundesbank.de/Redaktion/DE/D…

That is, if the EU thinks it can be relaxed with Trump because the bilateral current account with the US is balanced, this is certainly NOT the case for Germany. We have this surplus with the US, which led Trump to think that Germany is “bad, very bad”. /23

The “true” German surplus with the US may actually be lower than the $64bn mentioned above. Here, Netherlands comes into play. The US receives the lion’s share of its primary income surplus with the EU from NL. Other cases are Ireland and Malta. /24

US puts most of its European assets into NL, and those American affiliates then do business in Germany and wire the profit back home. I.e., @ClemensFuest points out that parts of the US primary income surplus from Germany is mis-measured as Dutch. /25
kurier.at/wirtschaft/dro…

But, again, it’s not so simple. If it were, then Germany would have to run a primary income deficit with NL, as the GER money is passed on to US. But it’s the opposite: GER, like the US, runs a surplus with NL according to @bundesbank. Story is more complex. /26

I guess nobody knows exactly what’s going on. Lots of statistical issues, measurement, etc. I noted Belgium could be an important piece in this puzzle. GER runs a huge prim income DEFICIT with BEL. Maybe the US daughter in NL has a daughter in BEL which does business in GER? /27

But then, also the US has a deficit (not a surplus) with Belgium. Something is really special about this country, but it’s unclear to me what it is… Any thoughts? @Brad_Setser @KeineWunder @GeneralTheorist /28

en.wikipedia.org/wiki/Belgium

All in all, there is no evidence for the claim that the German current account surplus with the US is just a “myth”, or the result of bad accounting. There are certainly issues to be resolved, and it may be smaller than $64 bn. But it’s there! /29

The overall German CA surplus is 8% of GDP, or 262 billion Euro. Germany also runs a surplus with Europe (120 bn) and with the Eurozone (80 bn). It runs a surplus with almost anyone, including the US. This is a PROBLEM! /30

This brings me to my final point: Germany has to reduce its overall current account surplus! IT IS TOO LARGE!!! With our 8% surplus we are violating the rules, which state than you can have AT MOST 6%! We need to stop that. /31

I know that there are some good reasons for a surplus, as GER is an ageing and capital-abundant country. Fine. This point you can make for a surplus of maybe 3-4% of GDP. But not 6% and certainly not 8%! /32

Every year, we assemble ever more foreign assets whose value may go down considerably when things get ugly. In that case, we may have enjoyed the nice labor market boom that goes with it. But essentially we’d have given away all the nice export goods for free. /33

We better do something about this problem: Raise domestic public investment, stimulate private investment through tax cuts on R&D spending and deregulation, reduce the VAT to stimulate consumption. That’s what we should be discussing in Germany right now. /34

A few suggestions are in this old piece, which I have also written together with @GFelbermayr for @faznet . /34

faz.net/aktuell/wirtsc…

Other people have also made good suggestions. Check out, for example, the great @MakronomMagazin for more. /35

makronom.de/schwerpunkte/w…

As an aside, notice that this entire discussion has nothing to do with the buzz about Target2-ímbalances, but let me not get into that right now. Let me rather end this thread with a summarizing statement: /36

Germany must do its homework and address the notorious export surpluses. Otherwise someone else (like Donald Trump) will resolve the issue for us.

The discussion of the last week – about the allegedly closed US-EU current account - has not changed this even a single bit. /END

PS: @Brad_Setser has weighed in with some very insightful comments! See here:

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PPS: @FAZ_Wirtschaft picked up my thread in a very good article by @WinandWvp and @laserspex . Amazing! I guess two years ago, nobody would have thought that the public could ever be interested in the meaning & measurement issues of current accounts 🤓

faz.net/aktuell/wirtsc…