It took a very long time. Too long. But just in time for the recent G20 meeting in Hamburg on July 7-8, The Economist’scover page story featured Germany’s persistent current account surpluses as the world community’ new “German problem”; supposedly an issue of foremost interest to the G20. In fact, Germany has run up current account surpluses exceeding 4 percent of GDP in each and every year since 2004. For the last couple of years Germany’s surpluses even exceeded 8 percent of GDP. Running at over 250 billion euros annually, Germany is the world champion in what is often portrayed as a global competition by the German media and body politic, and not without pride. At close to 300 billion US dollars last year, China’s surplus of 200 billion dollars only came in as a distant second.
Just as with Germany’s, China’s external surpluses had started to skyrocket at the time of the global boom of the 2000s. It reached a peak at over 400 billion in 2008, amounting to close to 10 percent of China’s GDP at the time. Since then China’s current account surplus has roughly halved and amounts to less than 2 percent of China’s GDP today.
At least in that regard, China is a good global citizen. Reducing and containing “global (current account) imbalances” has indeed been one of the agreed upon objectives of the G20 from the time the group of leading countries took fresh prominence in the context of the global crisis. At the 2009 Pittsburgh summit, the G20 leaders conceived the group’s “Framework for Strong, Sustainable, and Balanced Growth.” While other countries have generally significantly reduced their current account deficits or surpluses, respectively, since the crisis, Germany is the conspicuous outlier as the country’s current account surplus has leaped into its unchallenged lead position of today.
The Economist was rather late in pointing this out so prominently on its cover page just prior to the G20 Hamburg summit. Perhaps it is too hard today to miss the writing on the wall that is a signature piece in Donald Trump’s “America first” strategy to global issues. The US president may get some of the details wrong about Germany’s trade and may also be wrong in bringing a sharp bilateral angle to the matter. But, globally, the situation is simply undeniable: Germany is the world champion of large and persistent current account surpluses. The country is in continuous breach of the “rules of the game” without showing any signs of discomfort about an “achievement” that much of the country even takes pride in.
There are of course no such agreed and legally enforceable rules in place at the global level. When Secretary of the Treasury Timothy Geithner back in 2010 proposed a G20 agreement to cap current account imbalances at 4 percent of GDP, Chancellor Angela Merkel rejected this outright. She argued that in view of the European “single market,” the whole European Union should be treated as a unity and that member states’ national trade imbalances were “not meaningful” anymore. In her view, the whole idea of setting specific targets for external imbalances was “too narrowly conceived” (see here, here, and here); which contrasts rather curiously with Germany’s notorious insistence on very specific targets for maximum levels of budget deficits for eurozone member countries.
Perhaps Merkel’s excuse made at least some sense prior to the global crisis when 80 percent of Germany’s current account surplus had its counterparts within the EU and roughly two-thirds within the eurozone, which, overall, had a balanced current account position (see here and here). The excuse would have made even more sense if the EU and eurozone authorities had subsequently shown some real skills and competence in handling the eurozone crisis, preventing that crisis from having such a massive impact on the global economy. The eurozone crisis squeezed Germany’s regional surpluses vis-à-vis its European partners, but the country’s external surpluses with the rest of the world surged simultaneously (see here and here).
Today, Germany is also in blatant conflict with the rules of the EU’s so-called “Macroeconomic Imbalances Procedure” that limits current account surpluses to 6 percent of GDP (as opposed to the 4-percent-of-GDP limit set for deficits, an asymmetry pushed through, of course, by Germany). It is to be suspected that behind closed doors Germany may even try to excuse itself and silence its euro partners by pointing out that today Germany’s surpluses are primarily vis-à-vis the rest of the world rather than within the currency union. In fact, the eurozone as a whole, too—much in contrast to the situation prior to the crisis—has started running up current account surpluses on the order of 3–4 percent of GDP in recent years. Last year its current account surplus reached 400 billion US dollars and the IMF forecasts that the eurozone will continue running surpluses that are little smaller than that for many years to come. In other words, the eurozone has turned German.
Is that a problem? Is The Economist right to refer to a “German problem” in this context?
The Economist refers to the threat to free trade that Donald Trump’s agenda has come to pose and then argues that Germany saves too much and spends too little, which would make the country an odd defender of free trade. The Economist diagnoses that protracted wage restraint was behind the country’s sluggish domestic demand growth and sizable gains in competitiveness (see here and here), arguing that the “adverse side-effects of the model are increasingly evident. It has left the German economy and global trade perilously unbalanced.” The Economist calls on Germany to enjoy faster wage growth and spend more, including by increased public investment, both for its own good and its partners’ sake, and to help protect free trade along the way and in the face of the Trumpian threat.
To any neutral observer—let’s say to a visitor to earth from outer-space who was beginning to wonder whether Germany may be in the process of designing a scheme for planet earth to start sending its excess products to outer-space—this proposal will look like a no-brainer. But no sooner has The Economist stated the obvious then self-acclaimed voices of superior wisdom jump to Germany’s defense and dream up excuses as to why it’s apparently not a problem that Germany is doing what it’s doing right now, running gigantic and persistent surpluses vis-à-vis every region and almost every country in the world.
In Germany itself the list of excusers would be endless. As an example it must suffice to point toward Andreas Kluth, the Handelsblatt Global‘s editor-in-chief, who himself had previously worked for many years with The Economist, “a magazine proud of its classical liberal heritage,” but which now appears to have lost its bearings. Or is Mr. Kluth just a typical case illustrating that Germany’s intellectual barricades go up when the country’s supreme competitiveness is under siege? In any case, Mr. Kluth is dismayed about his former journalistic home which, in his view, “infantilized and caricatured the German point of view.”
Mr. Kluth’s arguments are representative of that very “German point of view” (read: excuses), stressing German demographics, Germany’s “debt brake” as a fiscal constraint, and the idea that it’s all the result of “80 million [German] people making independent decisions” and hence an issue – rather than a problem – that cannot be laid at the government’s doorstep anyway. Mr. Kluth does not seem to entertain the possibility that the same kind of peculiar national viewpoint – and its peculiar propagation in the German media strictly toeing the national line – may have played a constructive part in orchestrating “wage restraint” as a national agenda in the mid-1990s when the country allegedly had to “restore” its competitiveness. Instead he ventures that “The Economist seems to be channeling Keynes in demanding that Germany ‘pay people to dig holes and then to fill them up’.” How could The Economist be so stupid and reckless to even consider any Keynesian ideas in this context?
Over at The Financial Times, there is the peculiar case of Martin Sandbu, who writes a daily “Free Lunch” column on a wide range of economic topics. Last week Mr. Sandbu reserved a total of three columns on the matter. What does Mr. Sandbu have to offer on the German problem?
In response to The Economist’s take, Mr. Sandbu comes up with two terrific insights that are meant to excuse Germany’s notorious current surpluses. Insight number one, presented in the first column, is that the level of the trade balance concerns the level of GDP, while the change in the trade balance concerns the growth of GDP. Since the German trade surplus is merely big but not currently getting any bigger, Mr. Sandbu concludes that Germany cannot be a “drag on global growth” today, as is widely argued (including by The Economist). So no German problem here.
Mr. Sandbu’s second grand insight, reserved for column two, is that even persistent capital outflows from Germany – the inevitable counterpart to Germany’s persistent trade surpluses – would not be a problem either if only Germany accepted low rates of return on the savings it sends abroad while the receiving countries channel those savings into productive investments. He points towards evidence that the improvement in Germany’s net international investment position falls well short of what its cumulated current account surpluses would imply; prima facie evidence of huge valuation losses and/or write-offs and correspondingly meager rates of return on foreign investments (see here). So if Germany isn’t too greedy, and recipient countries get to learn how to avoid bubbles, then Mr. Sandbu doesn’t see a German problem here, either.
These are curious ideas to say the least. While the first insight is logically correct as far as it goes, Mr. Sandbu fails to mention that a trade imbalance of the German 300 billion US dollar magnitude means that, year after year, some other countries somehow need to generate “overspending” of said magnitude to merely sustain the current level of global GDP, not to mention generate more overspending to enable continued growth in Germany’s surplus as actually seen over time. (Mr. Sandbu wrongly states that if GDP, exports, and imports all grew at the same steady rate, Germany’s surplus would stay the same. It would not. With German exports being so much bigger than imports, the latter would need to grow faster than the former to keep the balance constant.) The trouble is that the counterpart countries to Germany’s surpluses will run up rising debts in the process. Prior to the crisis these were mainly Germany’s European partners (see here). Today Germany and the eurozone as a whole are playing the same game vis-à-vis the rest of the world. Doing the same thing over and over again and expecting different outcomes does not constitute wisdom or prudence.
Curiously, what Mr. Sandbu seems to suggest here would amount to a kind of “transfer union.” And that could actually work. In the extreme case, Germany would send its excess products abroad without getting anything in return. Germany could of course get a piece of paper that says 0.1 percent interest on a loan repayable after 500 years. But that would amount to much the same thing. As is well known, Germany has been adamant about not establishing a “transfer union” among eurozone countries. Germany insists on payment for its export surpluses, which is important so that the German export interests concerned can happily book their profits (and cherish the upward redistribution in incomes accomplished through wage repression). Germany also insists on repayment of any “bailout” debts from its partners. Nor would Germany be happy if any of the debts issued by troubled countries, either directly or indirectly, end up on the eurosystems’s balance sheet and the ECB is forced to run ultra-low or even negative interest rates to make the whole scheme viable, at least for now (see here; “hello” TARGET 2). Ultimately, though, there is no way to get around what I dubbed Germany’s “euro trilemma”: Germany just cannot have it all—perpetual export surpluses, a no transfer / no bailout monetary union, and a “clean,” independent central bank.
Mr. Sandbu’s solution to the trilemma seems to be that Germany and the eurozone should simply spread their persistent surpluses widely across the whole world. Perhaps dragging along the eurozone is not too bad for the global economy when the drag on global growth – which according to Mr. Sandbu is not a drag at all – is spread among many and no particular individual countries load up too much debt too quickly. The other part of Mr. Sandbu’s advice is important here too, namely, that countries need to find a way to tame capital flows. Luckily, as we all know, that’s very easy. Especially when the whole world keeps on pushing the old mantra of liberalized global finance.
We may ignore here Mr. Sandbu’s third column written in response to heat from some readers. There Mr. Sandbu just repeats his earlier insights but he does not really add anything new to them. We will also leave aside here the inklings of loanable funds theory – with saving somehow financing investment (see here, here, and here)– that seems to inform Mr. Sandbu’s solutions to an apparent non-problem.
A final remark on an element that Kluth and Sandbu have in common may be in order. Both refer to Keynesian ideas or Keynesian logic. In Germany, to use “Keynes” in any argument about economics is code for “the reader may ignore it since it’s only by stupid Keynes.” In Germany, indoctrination has worked so brilliantly that just mentioning the name will turn off any (ignorant) reader. Strangely, Mr. Sandbu perpetuates this solecism, repeatedly making reference to the notion of “simple” or even “simplistic” Keynesian logic – a signal to the reader that the writer has something superior and more sophisticated on offer. Alas, we can only conclude that perhaps simple Keynesian logic is not quite simple enough for everyone. It may be particularly challenging to writers who appear to be stuck in flawed pre-Keynesian logic.
Category: Eurozone Crisis