German economic reform is vital for sustained recovery in the Eurozone and the world. That was the subject of Wednesday’s leader article in the Financial Times. I absolutely agree and have written about this before here, here and here, so I will not go into too much detail this time. These ideas are not my own, but I find them convincing and believe they should be widely disseminated.
Germany is running a current account surplus of more than 8% of GDP. This reflects a massive total surplus of private and public sector savings over investment: firms, households and the government are in aggregate net savers. This is deflationary for the country itself as well as its trading partners, many of whom are members of the Eurozone.
If a robust and sustained recovery is to take place across Europe, reducing unemployment and increasing wages as well as profits to benefit the majority, the region’s current account surplus countries need a change of course. By far the most economically influential economy in the continent is Germany.
The German economy needs to act as a driver of the growth of demand and output for its neighbours. To do this it needs to rebalance its economy so that investment, both public and private, increases relative to savings for the economy as a whole. Whatever reforms are put in place, this should be the outcome.
The policies could take the form of public investment in infrastructure or other reforms to create opportunities for faster growth in private investment. This will reduce the country’s current account surplus and stimulate the net exports of its trading partners, making it easier for those of them who are running current account deficits to reduce them and grow sustainably without accumulating so much debt. If the policy is a success and a more balanced regional economic recovery takes hold, public and private debt levels as a proportion of GDP could start to fall. So too should unemployment, which is far too high in many European countries.
One of the root causes of the Great Recession and subsequent Eurozone crisis was the build-up of current account imbalances across the world. As Michael Pettis has argued in his book The Great Rebalancing and on his excellent blog, reducing these substantially is the key to a successful and sustained recovery in the global economy.
Without such a change in the German economy, the economic future of the Eurozone looks bleak.