<p>I am currently reading the book and came across the surplus recycling mechanism. To my understanding, the reason behind his use of the term was linked to the imbalance in trade and in capital cash flows of one region vis-à-vis another. 
More specifically, he talks about the SRM as being another alternative to tackle trade deficits in poorer regions. As an example, he talks about the unemployment benefits in Yorkshire ( Britain ) being paid through taxes raised in Sussex. </p>

CC BY-SA 3.0
2016-09-11T08:54:47.053Z
2016-09-11T08:54:47.053Z
Miguel
<p>My understanding is as follows:
The Bretton Woods agreements established fixed exchange rates for European and Japanese currencies against the US dollar.   If those rates were properly chosen, they would be in inverse proportion to the demands for goods and services (g&amp;s) from the US and from the other countries:  that is the greater the excess of demand for US g&amp;s over the trading partner's g&amp;S, the fewer US dollar would be offered in exchange for that country's currency.  Thus, an equilibrium could be attained between the flow of g&amp;S and the flow of US dollar.<br>
If that equilibrium no longer held because a partner began to fall in its export of g&amp;s to the US over its imports, then the exchange rate would come under pressure because the foreign currency was not worth the dollars established for it by the exchange rate fixation.  To prevent the fixation from being shattered by the market pressure on the deficit country, various mechanisms were employed, mostly in the form of loans of dollars to the troubled trading partner so that it could improve its offerings of g&amp;S and reduce its deficit  - I guess :)</p>

CC BY-SA 3.0
2016-09-26T03:19:52.970Z
2016-09-26T03:19:52.970Z
ADH
<p>"Surplus recycling" is a term coined (to my knowledge) by Varoufakis to describe the fact that a country that enjoys a <a href="http://en.wikipedia.org/wiki/Balance_of_trade" rel="noreferrer">trade surplus</a> should reinvest the surplus in the domestic economies of its trading partners. Such a policy was conduced with success by the United States in the years following WW2, where the <a href="http://en.wikipedia.org/wiki/Marshall_Plan" rel="noreferrer">Marshall plan</a> and similar policies in Asia took place, mainly for political reasons.</p>

<p>As Varoufakis states it, there is no reason for the market to proceed to such a transfer, yet it does sound reasonable to keep trade partners in good shape.</p>

<p>In Europe, Germany's trade surplus is notable for being the only important European surplus. Surplus recycling is one way the Greek government is trying to get Germans to feel right about handing out money to European countries that are struggling with their economy, another infamous attempt being WW2 reparations.</p>

<p>I believe you're somewhat wrong in your interpretation because the question here is not whether to reinvest or not (this is a problem which is well treated by "classic" macroeconomics), but where to reinvest the money. The alternative is hence between domestic and foreign investments, and there is no known economic mechanism that supports foreign investments unconditionally. Varoufakis work aims at fostering foreign investment from Germany to southern Europe. I don't see anything controversial in his definition, but he is defining a <strong>policy</strong>, not a <strong>model</strong>.</p>

<p>The problem with solely-domestic investments is that, on the long term, it weakens trade partners, which weakens domestic economy in turn. I don't think there is much debate among the fact that trade balance <a href="http://www.investopedia.com/terms/t/trade-surplus.asp" rel="noreferrer">is not a self-correcting problem</a>. The real debate (and it's political for the moment, an open field for economic research) is on what end the policies to solve the problem has to be carried: the one for which it is easier to solve (Germany), or the one for which the problem is worse (Greece).</p>

<p>The amount of money we're talking about is sizable to say the least, and can be viewed <a href="http://www.eurocrisismonitor.com/Data.htm" rel="noreferrer">here</a> as suggested in a comment.</p>

CC BY-SA 3.0
2015-05-23T15:26:19.693Z
Just to get a sense of the numbers we're talking about: The target2 balances show how much more € Germany receives than spends: http://www.eurocrisismonitor.com/Data.htm has a graph
user45891
CC BY-SA 3.0
2015-05-18T10:30:55.480Z
2015-12-19T15:02:34.727Z
2015-12-19T15:02:34.727Z
VicAche
<p><a href="http://en.wikipedia.org/wiki/Yanis_Varoufakis">Yanis Varoufakis</a>, the current finance minister of Greece, talks about a <em>"surplus recycling mechanism"</em>, a term he coined and uses to describe (as I understand it) a relief valve for economies running a surplus.</p>

<p>While I haven't read his book, I watched some of his talks and read his blog posts. I couldn't quite figure out what he means by this. Could someone please explain what he means by "SRM", and why he considers it important, crucial even, to prevent major recessions?</p>

<p>Here's what I've figured out so far. The surplus being talked about is the <em>trade surplus</em>. That is, countries which export more goods than they import run a surplus, and get a net influx of cash (or, in the past, gold). This cash can either be hoarded, or reinvested. Internal expenditure is ignored as irrelevant, as only the interactions between countries are being looked at. If hoarded beyond a certain breaking point, bad things happen. A surplus recycling mechanism compels a country to reinvest the cash overseas.</p>

<p>Or so it seems. Is my understanding of what "SRM" means correct? Also, if so, according to Varoufakis (or Keynes, who apparently had the exact same realisation around WW2 time), how exactly does hoarding without bound cause bad things / recession?</p>

<p>It would also help to know whether Varoufakis' ideas / interpretations are widely accepted by mainstream economists, currently being debated, or are a fringe/minority view.</p>

CC BY-SA 3.0
2015-05-02T04:48:52.847Z
The way you described it, SRM seems related to critiques of mercantilism (see http://en.wikipedia.org/wiki/Mercantilism). The SRM argument you described seems silly to me (a pile of money in a country that is ignored cannot hurt anyone), but I'm no macro expert.
Sander Heinsalu
CC BY-SA 3.0
2015-05-17T12:56:04.837Z
Perhaps this can help: http://yanisvaroufakis.eu/2011/02/09/what-is-a-surplus-recycling-mechanism-an-idea-going-back-to-bretton-woods/
Konstantinos
<macroeconomics><surplus>
What does Yanis Varoufakis mean by "surplus recycling mechanism"?
RomanSt
# What does Yanis Varoufakis mean by "surplus recycling mechanism"?

(Asked by: username_0 on 2015-04-26)

[Yanis Varoufakis](http://en.wikipedia.org/wiki/Yanis_Varoufakis), the current finance minister of Greece, talks about a *"surplus recycling mechanism"*, a term he coined and uses to describe (as I understand it) a relief valve for economies running a surplus.

While I haven't read his book, I watched some of his talks and read his blog posts. I couldn't quite figure out what he means by this. Could someone please explain what he means by "SRM", and why he considers it important, crucial even, to prevent major recessions?

Here's what I've figured out so far. The surplus being talked about is the *trade surplus*. That is, countries which export more goods than they import run a surplus, and get a net influx of cash (or, in the past, gold). This cash can either be hoarded, or reinvested. Internal expenditure is ignored as irrelevant, as only the interactions between countries are being looked at. If hoarded beyond a certain breaking point, bad things happen. A surplus recycling mechanism compels a country to reinvest the cash overseas.

Or so it seems. Is my understanding of what "SRM" means correct? Also, if so, according to Varoufakis (or Keynes, who apparently had the exact same realisation around WW2 time), how exactly does hoarding without bound cause bad things / recession?

It would also help to know whether Varoufakis' ideas / interpretations are widely accepted by mainstream economists, currently being debated, or are a fringe/minority view.

**Tags:** macroeconomics, surplus

> **Comments:**
> **username_1**: The way you described it, SRM seems related to critiques of mercantilism (see http://en.wikipedia.org/wiki/Mercantilism). The SRM argument you described seems silly to me (a pile of money in a country that is ignored cannot hurt anyone), but I'm no macro expert.  
> **username_2**: Perhaps this can help: http://yanisvaroufakis.eu/2011/02/09/what-is-a-surplus-recycling-mechanism-an-idea-going-back-to-bretton-woods/  

---

## 3 answers

### Answer by username_5 on 2015-05-18. Score: 10 | Accepted answer

"Surplus recycling" is a term coined (to my knowledge) by Varoufakis to describe the fact that a country that enjoys a [trade surplus](http://en.wikipedia.org/wiki/Balance_of_trade) should reinvest the surplus in the domestic economies of its trading partners. Such a policy was conduced with success by the United States in the years following WW2, where the [Marshall plan](http://en.wikipedia.org/wiki/Marshall_Plan) and similar policies in Asia took place, mainly for political reasons.

As Varoufakis states it, there is no reason for the market to proceed to such a transfer, yet it does sound reasonable to keep trade partners in good shape.

In Europe, Germany's trade surplus is notable for being the only important European surplus. Surplus recycling is one way the Greek government is trying to get Germans to feel right about handing out money to European countries that are struggling with their economy, another infamous attempt being WW2 reparations.

I believe you're somewhat wrong in your interpretation because the question here is not whether to reinvest or not (this is a problem which is well treated by "classic" macroeconomics), but where to reinvest the money. The alternative is hence between domestic and foreign investments, and there is no known economic mechanism that supports foreign investments unconditionally. Varoufakis work aims at fostering foreign investment from Germany to southern Europe. I don't see anything controversial in his definition, but he is defining a **policy**, not a **model**.

The problem with solely-domestic investments is that, on the long term, it weakens trade partners, which weakens domestic economy in turn. I don't think there is much debate among the fact that trade balance [is not a self-correcting problem](http://www.investopedia.com/terms/t/trade-surplus.asp). The real debate (and it's political for the moment, an open field for economic research) is on what end the policies to solve the problem has to be carried: the one for which it is easier to solve (Germany), or the one for which the problem is worse (Greece).

The amount of money we're talking about is sizable to say the least, and can be viewed [here](http://www.eurocrisismonitor.com/Data.htm) as suggested in a comment.

> **Comments:**
> **username_6**: Just to get a sense of the numbers we're talking about: The target2 balances show how much more € Germany receives than spends: http://www.eurocrisismonitor.com/Data.htm has a graph  

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### Answer by username_3 on 2016-09-11. Score: 1

I am currently reading the book and came across the surplus recycling mechanism. To my understanding, the reason behind his use of the term was linked to the imbalance in trade and in capital cash flows of one region vis-à-vis another.
More specifically, he talks about the SRM as being another alternative to tackle trade deficits in poorer regions. As an example, he talks about the unemployment benefits in Yorkshire ( Britain ) being paid through taxes raised in Sussex.


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### Answer by username_4 on 2016-09-26. Score: 0

My understanding is as follows:
The Bretton Woods agreements established fixed exchange rates for European and Japanese currencies against the US dollar. If those rates were properly chosen, they would be in inverse proportion to the demands for goods and services (g&s) from the US and from the other countries: that is the greater the excess of demand for US g&s over the trading partner's g&S, the fewer US dollar would be offered in exchange for that country's currency. Thus, an equilibrium could be attained between the flow of g&S and the flow of US dollar.  
If that equilibrium no longer held because a partner began to fall in its export of g&s to the US over its imports, then the exchange rate would come under pressure because the foreign currency was not worth the dollars established for it by the exchange rate fixation. To prevent the fixation from being shattered by the market pressure on the deficit country, various mechanisms were employed, mostly in the form of loans of dollars to the troubled trading partner so that it could improve its offerings of g&S and reduce its deficit - I guess :)


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