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. Continue reading →
This paper by Jorg Bibow has a useful take on how an ideology of anti-Keynesianism among German policymakers and its economic outcomes as a popular mythology result from a misreading of economic history. This faulty economic analysis has arguably played a major role in the eurozone crisis, and recent improvements in the eurozone economy are at the expense of the rest of the world. This is a form of ‘beggar-thy-neighbour’ policy, as a weak euro is stimulating demand for eurozone exports from its external trading partners, while domestic demand in the region remains weak. The eurozone economy is therefore improving by making the zone as a whole more like Germany in recent history, which has ‘succeeded’ via a dependence on export-led growth. Continue reading →
The German Bundestag. Change is needed on all sides involved in the current crisis, not least in Germany.
The German government’s ‘record’ post-unification budget surplus of nearly 24bn euros was in the news this week. As a percentage of GDP it is a mere 0.8%, but compared to the UK’s deficit of just under 4%, they seem to be doing relatively well, at least in terms of the desire expressed by many politicians for governments to ‘live within their means’. And this surplus does not seem to have come at the expense of economic growth. The German economy grew by 1.9% in 2016, the fastest in the G7 group of the largest economies in the world.
So how is this possible? Quite simply, it is down to the competitiveness of German exporters, achieved at the expense of ordinary German workers over the last decade or so.
Firstly, the deregulation of the labour market put downward pressure on wages at the bottom of the scale, so that Germany now has record numbers of low-wage, insecure jobs. Continue reading →
A nice piece by the Guardian’s economics editor Larry Elliott on the seemingly neverending tragedy of the (lack of) progress of the Greek economy. As he describes, Germany is refusing to follow EU rules and reduce its large current account deficit by boosting domestic demand, which would help Greece grow, rebalance and reduce its debt burden alongside its mountain of unemployment.
In the absence of a eurozone fiscal union, which seems unlikely, Greece can only come out of its nightmare, with all the mass human suffering that entails, if the eurozone countries running current account surpluses change course. The current ‘reforms’ in Greece will not do the trick in the absence of changes in the macroeconomic environment created at least in part by the policies of its neighbours. This is not about the lack of economic solutions, but of political and popular will.
Here is what would surely be an appealing narrative for ordinary Germans: how would you like a wage rise, and better public infrastructure, with the knowledge that this would help not only your fellow countrymen but also your southern european neighbours and in the process reduce their debt burden without you having to bail them out any further? Sound good? With support for the right economic policies, this much is possible.
Germany needs to lead the Eurozone in a different direction
The Eurozone is mired in economic stagnation. While overall growth is positive, it remains too weak, at under 2%, to reduce unemployment to satisfactory levels, particularly in countries such as Greece and Spain. A lack of widely shared prosperity is undermining the legitimacy of the EU political institutions, but there seems to be no appetite in the ‘core’ Northern countries to change course. What to do?
Two weeks ago I discussed the apparently different cultural attitudes to saving and consuming in the UK and Germany in recent years, and drew the conclusion that these attitudes were driven by economic factors. It would benefit both nations if their economies ‘rebalanced’, and in opposite directions. This would involve Germans becoming more ‘profligate’ by reducing net national savings and the British becoming more ‘prudent’ by increasing net national savings. Continue reading →
If there were an economic and monetary union, in which the power to act independently had actually been abolished, ‘co-ordinated’ reflation of the kind which is so urgently needed now could only be undertaken by a federal European government. Without such an institution, EMU would prevent effective action by individual countries and put nothing in […]
After years of frugality, German consumers are finally spending again, at a rate not seen since the dotcom boom of the 1990s. According to the FT, private consumption is growing at about 2% per annum, driven by high levels of employment, rising wages, and low inflation and interest rates. This is welcome, and not only for German growth. If sustained, it could help rebalance the economies of both Germany and Europe.
Germany is the largest economy in Europe, and a number of economists have argued that its large current account surplus, far from being a virtue reflecting a culturally frugal population, is the flip side of the large current account deficits in the Eurozone periphery which led to the crisis in 2010. In short, in order for countries in the periphery like Spain to recover and rebalance while sustaining growth and reducing unemployment, Germany’s economy also needs to rebalance. The latter should involve higher wages, consumption and investment and lower net exports driven by higher imports.
The sum of all the current account surpluses and deficits in the global economy must by definition sum to zero, even if in practice measurement errors mean that they don’t quite. Given this fact, it is no good preaching to Spain to reduce its current account deficit in the absence of its trading partners reducing their surpluses. Continue reading →