Germany’s current account surplus has been a subject of heated debate for some time. On the one side, there are regular calls for the country to reduce its surplus through fiscal stimulus, to lift southern Europe from its doldrums. On the other side, in Germany these calls are often regarded as jealous attacks against the country’s extraordinary economic performance.
Both extremes bluntly simplify a complex reality in a way that kills any serious policy debate. Especially in the current context of coalition talks in Germany about a new government programme, it is important to look at the matter in an analytical manner to provide substantive elements for a well-informed debate.
Let’s look at the facts and consider what can be done in their light. For several years, Germany has run a sizeable current account surplus. Recent data indicate that the surplus has surpassed 6% of GDP in every year since 2007.
What is behind the large surplus? A key factor has been the deepening of European integration in the past ten years, since this has helped strengthen Germany’s industrial competitiveness in many ways. First, the creation of the euro prevented the German exchange rate from appreciating to reflect the large surplus. Second, the integration of the production chains with central and eastern Europe allowed Germany to diversify and profit from a large pool of well-educated and cheaper labour. And third, financial market integration and interest rate convergence drove international capital flows which mirrored these current account developments.
Equally important, adjustment channels are influenced significantly by global economic interdependence. Essentially, the eurozone is neither a small open economy nor a large closed one, but a large open economy that trades a lot with the rest of the world. Germany is specialised in products that are in demand in the rest of the world and is highly competitive on both quality and price. High savings and low investment in many sectors have contributed to the large and persistent current account surplus.
The prospect of Germany’s ageing population translates today into lower consumption and higher savings for retirement. Investment should go up now because an ageing population should see the economy becoming more capital-intensive. When ageing kicks in, savings should start going down and consumption up.
Moreover, around a third of the German current account surplus can be explained by returns on assets accumulated abroad in the years before the crisis, when excess savings in Germany and other core countries were redistributed throughout the eurozone and further afield. Instead of boosting productivity-enhancing investment, which would have enhanced sustainable growth, they largely ended up fuelling the credit booms and subsequent asset and housing bubbles in recipient countries. That mispricing of risk was detrimental to both sides: the catastrophic busts that hit the peripheral economies led to losses for the German banks themselves, adding to those incurred from their investments in toxic US assets. Meanwhile, investment in Germany has fallen from 21.5% of GDP in 2000 to 17.6%, a significantly lower proportion than in other eurozone countries.
In the economic analysis that the European Commission provides for the reinforced policy coordination, we have looked at the best ways of creating a win-win outcome for both Germany and the eurozone as a whole.
Removing the bottlenecks to domestic demand would contribute to a reduction in Germany’s external trade surplus. True, the increase in domestic demand has doubled in the past two years when compared to the eurozone as a whole, but it is still modest. Meanwhile, private investment is set to fall again this year.
The EU Council’s recommendations to Germany, adopted in July, urge the country to open up the bottlenecks to the growth of domestic demand. In particular, Germany should create the conditions for sustained wage growth, for instance by reducing high taxes and social security contributions, especially for low-wage earners. The country should further stimulate competition in services – construction in particular, but also in certain crafts, as well as professional services – in order to boost domestic sources of growth.
There are other pressing challenges too. The energy transition requires an improved regulatory framework to unlock private investment in energy networks. Boosting investment in infrastructure will help sustain domestic demand not only in the short term, but also in the longer term via its positive impact on productivity.
All this would enhance Germany’s economic performance and welfare and could help reduce the inequalities that have accumulated in recent years. But it would also have a significant positive impact on the eurozone economy. For while a rise in demand in Germany might not lead directly or immediately to a large rise in exports from southern Europe, the reforms the EU is advocating for Germany would facilitate a genuine and mutually beneficial rebalancing in the eurozone economy. Crucially, a rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery. To profit fully from this opportunity, there should be no easing of the drive to boost competitiveness through structural reforms.
Because these important issues deserve further analysis, the European Commission will this week need to consider whether to launch an in-depth review of the German economy in the framework of the EU’s Macroeconomic Imbalances Procedure. Such a review would provide both European and German policymakers with a detailed picture of the economic challenges and opportunities facing the eurozone’s largest economy.
Of course, Germany is not the only country whose policies have spillover effects on the rest of the eurozone. As the two largest eurozone economies, Germany and France together hold the key to a return to growth and employment in Europe. If Germany can take steps to lift domestic demand and investment, while France embraces reforms to its labour market, business environment and pension system to support competitiveness, they will together do a great service to the entire eurozone – providing stronger growth, creating more jobs and reducing social tensions.
A version of this article appeared in German on 11 November 2013 in the Frankfurter Allgemeine Zeitung.