Professor Barry Eichengreen writes in The Guardian on the unbalanced German economy, which I have posted on many times. As he says, the country’s large current account surplus reflects the excess of domestic savings over investment, as a matter of accounting. But he puts this down to an ageing population prudently saving for retirement, so does not see any medium term reversal of the household sector’s resulting financial surplus.
What he does not mention is the large net savings of German companies. To put it another way, corporate savings, or retained earnings, are larger than corporate investment. Rebalancing the German economy, and arguably restoring much greater prosperity to the EU and the eurozone, requires an increase of investment relative to savings. This an either be accomplished by consumption rising and the savings rate falling, the investment rate rising, or some combination of the two.
Although it is widely believed that Germany is an economic success story due to its successful exporters and low unemployment, its imbalances are a problem for Europe and the rest of the world economy. And as Eichengreen notes, it has “massive unmet needs in healthcare, education, and communication and transportation infrastructure”. This calls for increased public investment. This is perfectly affordable, given the country’s public budget surplus (an excess of tax revenue over public spending). It would also be likely to ‘crowd in’ private investment over the longer term, which would further benefit the German economy.
Rising consumption could possibly be accomplished by tax cuts, or by higher wages across the economy. German trade unions still have significant influence over wage-setting in industry, so they could potentially reach an agreement on higher wages which could influence other firms and sectors.
An increase in real wages relative to productivity would raise the wage share in national income and reduce the profit share. If domestic investment is constrained by lack of consumption, rather than by lack of savings, which seems to be the case, then a rise in the wage share would boost demand, investment, output and productivity. It seems like a win-win solution.
If the above analysis is right, increased public and private investment, as well as increased consumption, would act to strengthen domestic demand and, to the extent that it stimulates faster growth in imports, it would also strengthen demand abroad, across the EU, but also outside it. The former is vital to rebalancing the economies of Europe and achieving a more sustained recovery in growth and employment in countries such as Spain and Greece. So-called ‘structural’ reforms will not be enough by themselves.
Although most eurozone economies are now running current account surpluses, this is partly due to the relatively weak level of the euro and partly to weak overall domestic demand in the currency block. The latter is running a current account surplus with the rest of the world. A move towards balance via strengthening domestic demand in the zone driven by German investment and consumption would also boost demand in the rest of the world, rather than constraining it, as is the case now.
Faster growth in the eurozone periphery driven by rising net exports to a faster-growing Germany would offer the opportunity to reduce the burden of private and public debt in Greece and the rest of the periphery. Without such an adjustment, the survival of the single currency, and perhaps the EU as a whole, is doubtful. If they cannot help to deliver widespread prosperity to their citizens, they will continue to lose political legitimacy.