Building up financial claims is nice, but whether they ultimately yield real money you just have to wait and see.
The Netherlands knows all about that. Its banks, insurers and pension funds had invested many billions in the American housing market through all kinds of bonds and mortgage-backed securities. When the market imploded in 2007 and kicked off the great financial crisis, a large part of the investments had to be written off.
For an aging country, it is wise to put some money aside and invest outside of the country in future production. But you should not exaggerate it, as the Netherlands has done for decades. The Dutch pension funds alone now have € 1,400 billion in assets – about twice the Dutch GDP – and the majority of these have been invested abroad.
It all started in the early Eighties when the Dutch formulated an answer to the crisis in those days. With a policy of wage moderation, they made their exports more competitive and at the same time they limited imports. Via trade – or rather, by parasitising on growth abroad – the Netherlands pulled the economy out of the situation smoothly. Later, the Germans under Chancellor Gerhard Schröder copied the Dutch example. This model also proved to be the solution for Germany, the then sick man of Europe.
A fetish for competitiveness
With the economy back on track, wage moderation had to be released and wage developments had to go back into line with growth. But that did not happen in the Netherlands, nor in Germany. Those countries developed a fetish for competitiveness and export. Finally it was inevitable that somebody like American President Donald Trump would get angry. And rightly so.
The Hague and later Berlin should have used the revenues of trade to invest in their own economy, to make them more productive and future-proof. Instead, they kept sending the revenues abroad, where they precipitated in the form of financial claims to future production. The buffers of pension funds, banks and insurers give the Dutch and Germans a safe feeling. They never seem to consider the risks of building up claims.
Since the European debt crisis, the model has also been imposed on the rest of Europe. Recent ECB data show that the euro area had a trade surplus of € 530 billion in 2017, almost 5% of the region’s GDP. Even the peripheral countries with their chronic shortages now all have surpluses.
Never before in history
Each time the countries in the eurozone produce 100 units of goods and services, they only consume and invest 95 in their own country. The gap may seem narrow but repeated year on year it is, in reality, quite considerable. To conclude, never before in history has such a big economy as that of the euro zone managed to realise such surpluses.
The fact that the USA, a perpetual deficit country, has an angry president is therefore not surprising. If he plunges the global economy into chaos by waging his trade wars, it’s not difficult to guess what happens to the value of the worldwide outstanding financial claims of surplus countries.
- This column was first published in Het Financieele Dagblad on Monday, July 16th (in Dutch)