Dirk Ehnts has a useful post on the persistent and growing imbalances in the German economy. The latter’s current account surplus is forecast to reach a record 250 billion euros or 8% of GDP in 2015, partly due to the weakness of the euro which has boosted demand for German exports.
A significant proportion of German exports go to the rest of the EU and this creates a problem for those who wish to see the continent’s economy recover at something more than the current painful crawl, alongside a major reduction in unemployment. It is also a problem for the rest of the global economy, as the growing Eurozone current account surplus imparts a deflationary impulse abroad.
A weak euro, aided by the European Central Bank’s (ECB) policy of Quantitative Easing (QE) may help to boost net exports and growth on the continent, but it drains demand from the rest of the world.
A current account surplus for a nation or region reflects an excess of domestic savings over investment. There are two ways in which this can be resolved: either by an increase in consumption and a corresponding reduction in the savings rate (the growth solution); or by a rise in unemployment, which will accompany slower growth and a fall in output relative to consumption. A rise in consumption will at some point boost investment, once enough firms in the economy reach full capacity and need to expand beyond it. This is known in economics as the accelerator effect: rising consumption stimulates investment. If domestic investment and savings balance, then the current account will balance too. Germany needs to reduce its excess savings through a rise in consumption, and it needs to boost investment, both public and private. The government could bring this about through spending on infrastructure, and through measures designed to encourage private sector growth. For much of the 2000s, wages were held down in Germany, and this constrained consumption and increased savings. Wage rises that match productivity growth, or even catch up with it, would boost consumption and, via the accelerator, investment. Tax cuts for low earners might help to further boost private spending.
As the largest economy in Europe, Germany and its government’s economic policies have a major impact on its trading partners and the world at large. The current policy trajectory is unsustainable and is neglecting the role of imbalances between savings and investment and on the current account, that are draining demand from the global economy. Germany should take a lead and aim to resolve these imbalances through policy changes, rather than basking in the success of its manufacturing exporters. While the current stance benefits the latter, it is bad for the German people as a whole. Faster growth in Germany through a significant rebalancing of its economy would raise wages for the majority, and help its struggling Eurozone partners reduce their imbalances, increase growth and reduce unemployment. It would also contribute to global growth, which at the moment is slowing due to developments in China and elsewhere. It would thus be a win-win solution.