Tuesday, August 28, 2012

A German Sovereign Wealth Fund to save the euro

by Daniel Gros and Thomas Mayer


August 28, 2012

Large German trade surpluses are ingrained in the Eurozone’s structure, but private sector mechanisms for dealing with the corresponding capital account deficit are broken. The unavoidable result has been large official capital account deficits by Germany (the bailouts) and the Eurosystem (Target2 balances). This column proposes the creation of a Germany sovereign wealth fund that would restart the private recycling of Germany’s excess savings – eventually cleaning out the Target2 imbalances and depreciating the euro in the process.

Since the early 1950s, German savings have tended to exceed investment with the inevitable result that that Germans have, on net, been investing in foreign assets.
  • Most of these excess savings have been intermediated by the domestic banking system.
The banks have difficulties investing German surpluses abroad given that they finance themselves through deposits in the national currency and thus cannot take exchange rate risk. The resulting exchange rate adjusted tended to keep the surplus under 1% to 2% of GDP most of the time.
  • With the advent of the euro, exchange rate risk within the Eurozone disappeared and German surpluses vis-à-vis EZ partner countries could and did become much larger.
  • Large surpluses seem to have become structurally ingrained at a whopping 6% of GDP; that is more than a quarter of national savings.
As the sovereign debt and banking crisis took the Eurozone in its grip, the appetite of German private investors for Eurozone public and private debt diminished sharply. Investment outside the Eurozone was not an alternative given that a large number of German savings are still intermediated by banks and must thus remain denominated in euro.


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