Heiner Flassbeck and Patrick Kaczmarczyk write that amidst global political and economic fragility, the downturn in the Germany economy adds to the uncertainty in a world that, as Paul Krugman put it, has a “Germany problem”. It not only raises questions and doubts over the future of the largest European economy but, …More …
In the video below from the Real News Network, former economist at UNCTAD, Heiner Flassbeck, discusses some of the problems besetting today’s global economy and claims that they have deep historical roots. Germany may be heading for a recession due to shrinking exports linked to the ongoing US-China trade war and weak demand in Europe.
Flassbeck argues that the cause of sluggish global demand lies in the weakness of corporate investment compared to corporate saving alongside stagnant wages and the insufficient response of governments in Europe to counter this with more expansionary fiscal policy.
This has been brewing since the 1970s. The US under Reagan, Bush junior and most recently Trump has on a number of occasions responded to sluggish growth with higher fiscal deficits. The exception came under Clinton, when a booming economy and fiscal tightening produced several years of budget surpluses, which ultimately proved unsustainable.
In contrast, many European economies have remained wedded to tighter fiscal policies and austerity in the run-up to the creation of the euro. Since 2000 Germany has relied on foreign demand to drive growth, and now runs, in absolute terms, the largest current account surplus in the world.
Corporate surpluses are also excessively large in Japan, but the government continues to run a moderately large budget deficit which absorbs some of these savings and sustains aggregate demand to a degree. The German government is now running a budget surplus, which withdraws demand from the economy, leaving net exports as the driver of growth.
Ideally, corporations would use more of their retained earnings for investment, rather than running up surpluses as they are doing at the moment, particularly in Germany. This would increase spending on the demand side, and the capital stock on the supply side, boosting growth in output and some combination of employment and productivity.
In the absence of strong corporate investment growth, sufficient demand to support economic growth has to come from household consumption, net exports, or from the government. With insufficient household income growth, Germany has relied excessively on growth in exports enabled by sluggish wage increases for twenty years. In a weakening global economy, it is now suffering again and could be on the brink of recession.
A more sustainable return to healthy economic growth and fuller employment with rising living standards would see household incomes rising for the majority through significant wage increases, stimulating consumption and providing greater incentives for companies to increase investment in new capacity and employment. Also needed is some degree of fiscal expansion which includes public investment in necessary infrastructure and support for those on the lowest incomes.
The corporate sector surplus (the excess of savings over investment) in a number of large economies needs to shrink as wages and household incomes rise alongside corporate investment. This would lessen the need to rely on large and persistent fiscal deficits, which have supported demand in Japan on and off for well over two decades but have not by themselves created the conditions for a return to more balanced economic growth over the longer term. It would also lessen the need for consumption to be excessively dependent on rising debt, as in the UK and US.
More balanced global growth and reduced inequality within countries which have seen the latter soar since the end of the 1970s can be achieved together.
Flassbeck does not really discuss the reasons behind excessive corporate savings relative to investment, aside from a brief reference to neoliberalism, and he ignores the problem of private debt in China, but the interview is interesting and worth a watch.
The IMF recently published its Economic Outlook for Germany. The report itself is quite long but a brief description of the key points can be found here. I have written before on the problems caused by Germany’s supposedly ‘prudent’ saving behaviour and export prowess, and the IMF covers this issue quite well, although as a report focused on one country, it does not consider the global implications. Here I want to focus on one aspect of the report: the financial imbalances of Germany’s economy and their relationship to both inequality and future growth prospects, both domestically and in the rest of the world.
In macroeconomics, one can consider the financial balances (net borrowing or net lending) of the three main sectors in the economy as a whole: the private sector (firms and households together), the public sector (government) and the foreign sector (the rest of the world). Together these balances can be used to analyse the total flows of expenditure and income between the three sectors, both within that economy and between that economy and the rest of the world.
If a sector runs a financial surplus over a particular period, its income for that period will exceed its expenditure and it will either be accumulating financial assets from another sector or paying down debt owed to another sector. For example, if the government runs a surplus, then revenue from taxation will exceed public spending and it will be able to pay down government debt held by the private sector, either domestically or abroad. Continue reading
There is a nice piece in this week’s New Statesman by economics commentator Grace Blakeley on the dangers of the unresolved eurozone crisis, with Germany at its heart. With growth in the eurozone currently slowing, after a brief spurt, unemployment is set to remain unsatisfactorily high in a number of countries, not least Greece and Spain. Germany itself is teetering on the brink of recession.
As Blakeley argues, resolving the crisis requires the northern states of the currency block to expand domestic demand. This is particularly necessary in Germany, the largest economy in the eurozone, which is running a current account surplus of nearly eight percent of GDP. It is thus overly dependent on external demand, and growth in world trade.
What the piece misses, maybe in order to avoid unnecessary complexity, is that a decade of wage stagnation in the 2000s, while rendering German exporters more competitive and profitable, and boosting employment, has also squeezed household incomes and raised national savings relative to investment. This is reflected in the aforementioned large current account surplus, which is by definition equal to the gap between domestic savings and investment. Continue reading
Tracing a connection between rising inequality and the Great Recession of 2008 is appealing to leftist economists. It suggests that what they see as two of the potential downsides of capitalism and in particular the neoliberal economic order can perhaps be mitigated via appropriate policies. Thus, a more egalitarian capitalism can become less prone to crisis or recession.
Of course, what is appealing as social and economic outcomes is not a good enough reason to investigate linkages between them, though I suspect that I am far from the only one who is drawn to particular ideas as a matter of bias.
Perhaps there is nothing wrong with that as a starting point, followed by economic analysis of the chosen object of study.
An article in the latest issue of the heterodox Cambridge Journal of Economics explores the potential linkages between the distribution of income and current account imbalances in a simplified model of the global economy consisting of the US, Germany and China, prior to the 2008 recession.
These three countries had the largest current account imbalances in absolute terms in the run-up to the recession. The US ran a deficit, and Germany and China were running surpluses. Since these imbalances have been pinpointed by some economists as a cause of the recession itself, analysing them is important. Continue reading
The Economist magazine leads this week with an article on Germany’s large current account surplus and the problems it is causing the rest of the world.
This surplus, which means that Germany is lending its equivalent abroad, is equal to the excess of national saving over national investment.
It means that the rest of the world is running a current account deficit with Germany, since the sum of all the world’s current account surpluses and deficits is zero. If the rest of the world is running an overall deficit with Germany, this means that it is accumulating debt, funded by Germany lending its net savings, or the savings that are not invested domestically.
I have discussed these matters in previous posts, but the article cited above makes a useful point. The potential for reducing the German current account surplus is being played out as a conflict between economic and institutional forces. Continue reading
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