You may have read a few times the old mantra that says that  the German trade surplus is an excess of savings that harms the Eurozone.

The fallacy that the German – or any other- trade surplus is a problem starts from the bureaucrats’ view that economic agents are wrong and a group of politicians knows better what and how much a country should import.

A trade surplus is generated when a country exports more than it imports. Great. No country has ever suffered from selling more than it buys, especially when its purchases grow every year. In the case of Germany, it does not export a lot because prices are too low or because there is no internal demand. It exports a lot due to the combination of quality, added value and technology. Most of its products sold abroad are not cheaper or sold in bulk discount. Therefore, Germany’s export boom is not an anomaly caused by interventionism or dumping.

Let’s look at imports. Are imports from Germany too low? Not at all. Germany does not suffer from a deficit in infrastructures or in supply to its consumers and companies. The idea that imports from Germany are low is simply incorrect. Does anyone really think that German companies and economic agents do not purchase more because they want to annoy the world? There is no economic or demand indicator that shows that German consumers or companies are failing to meet any of their consumption needs.

Germany is the third largest global importer and its purchases abroad have increased  by 6.1% per year in the last five years. Germany shows no sign of a deficit in spending or import needs. Rather the opposite.

Germany maintains a high industrial utilization, which has risen from 70.9% in 2009 to 86% today, ie almost all-time high capacity utilization (87.5% average). There is not a single indicator of public expenditure that suggests lack of consumption. The German government expenditure  has grown  almost to historic highs and is expected to continue to increase, maintaining the correct objective to keep public debt under control (over 71% of GDP).

Private investment is already above pre-crisis levels, has been growing since 2009 and remains at exactly the level that companies need according to their growth expectations and the opportunities they see. No more, no less. The presumption that a group of bureaucrats and politicians know better than these companies about where, how much and how to invest is simply hilarious.

The idea that investments should increase because a committee says so, does not take into account that, before the crisis, Germany had embarked on a huge capex cycle. The mistake of criticizing German private investment is to think that the 2004 to 2009 period should be perpetuated eternally. In any case, Germany cannot be accused of lack of private investment, which has steadily increased until recovering pre-crisis levels. Public investment has also increased to 33 billion euro a year.

Those who assume that Germany’s trade surplus, 252.9 billion euros, is an anomaly and a negative for the Euro zone, fail to answer two questions: “What do they know that German companies, governments and consumers do not know about their consumption and investment needs?” And “what for?”

The idea that if Germany decided to spend a lot more it would solve the problems of the European Union is a fallacy. Doubling imports from the Euro zone would have a maximum impact of 0.4% of GDP. Once. The excess capacity in the rest of Europe is close to 20%. If Germany doubled its net investment in Spain, for example, it would  mean less than 650 million euros. Exports from Spain to Germany have already increased at a rate of 8% to 27 billion euro. Exports from the periphery countries to Germany have reached all-time highs. But, above all, it is a fallacy because it ignores that a great part of that unnecessary expense would only cause a short-term bubble that bursts rapidly. Europe would be repeating the same mistakes that led the peripheral countries to create excess capacity and massive imbalances.

The fallacy of “stimulating internal demand” ignores relevant trends such as past spending and excess capacity, efficiency and aging of the population, with the magic idea of ​​solving everything by repeating the mistakes of 2004 to 2007. There is not a single economic indicator in Germany that shows weakness or any need of stimulus.

Does anyone really think that Germany does not invest, import or consume what it needs? What for? To annoy its citizens and its business partners and, at the same time, lose money leaving idle opportunities? It does not make any sense.

There is no single indicator that shows that Germany is saving unnecessarily or that it does not invest, consume and import everything it needs and more. Germany’s trade surplus, its balanced accounts and its net investment position shows that Germany’s policy is not the problem, but the solution to the imbalances of the European Union.

Reducing Germany’s trade surplus via unnecessary imports and useless spending would only take the EU to the same disaster of the 2007 bubble, with its terrible consequences. Demanding Germany to invest and spend on things it does not need would be a monumental mistake and would not solve anything. It would be a short-term mirage, and an inevitable crisis.

The solution to the problems of the Euro zone is not for Germany to copy the imbalances of peripheral countries, but for Europe to learn from the German success model.

Daniel Lacalle. PhD in Economics and author of “Life in the Financial Markets”, “The Energy World Is Flat” (Wiley) and forthcoming “Escape from the Central Bank Trap”.

Image courtesy Google.

The Euro zone CPI data continues to show the rising trend we commented here (read). In January inflation rose by 1.8% year-on-year, the highest reading since February 2013.

However, while inflation expectations rise, markets remain stale. The stock market is not showing any boost from this reflation trend. Why?

Inflation is up mainly due to energy’s positive contribution (8.1% year-on-year in January, from 2.6% in December) and food prices (1.8% year-on-year). None of those two components are positive for the economy, consumers or companies, as Europe is mainly an importer of energy and commodities.

Core inflation remains stale at 0.9% year-on-year despite a massive stimulus of 80 billion euro a month from the European Central Bank, new credit growing and improved PMIs. Europe’s massive overcapacity continues to burden the economy, and no central bank can disguise that.

There has been some acceleration in non-energy industrial goods prices (to 0.5%) but some softening in the services component (to 1.2% from 1.3%), which shows that the policy of creating inflation by decree is not working.

The Eurostoxx 600 Index is comprised mostly of banks, utilities, telecom companies and construction-industrial conglomerates. None of these benefit from rising CPI due to external factors. Even integrated oil companies in Europe benefit more from refining margins than oil prices. Banks still struggle from 900 billion euro of Non-Performing loans and poor Net Income margins, and although earnings season is shaping to be better than expected, the risk of stagflation as well as political uncertainty in the face of French, Dutch and German elections weighs on a stock market where companies in the previously mentioned sectors are very exposed to political turmoil.

The question is, if after such a massive quantitative easing program in Europe, core inflation remains so weak, the risk of a burst in prices can arrive at the same time as GDP growth remains subdued. With 2% inflation and lower nominal GDP growth, Europe could risk moving to stagflation.

So far, earnings are better than expected and guidance is more robust. Once the uncertainty of elections passes,  we could start to see some relief in European stocks. In the meantime, energy prices are cooling down, which could help reduce the import factors of inflation. But, until then, rising inflation due to commodities has no positive impact on equities.

Daniel Lacalle. PhD in Economics and author of “Life in the Financial Markets”, “The Energy World Is Flat” (Wiley) and forthcoming “Escape from the Central Bank Trap”.

Image courtesy Santander Research