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 →
Keen’s central thesis is that mainstream economics failed because it ignores the role of private debt creation by the financial system, known in the jargon as ‘endogenous money’. This grew unsustainably in many countries in the decades prior to the crisis and drove a boom in the real economy and, even moreso, in asset prices (stock markets and housing). Credit expansion in economies such as the US and UK started growing consistently more rapidly than GDP in the 1980s, following the deregulation of the financial sector. Although it was subject to cycles, the trend in private debt as a share of GDP was upward. When its growth slowed or even went into reverse, the result was a severe recession and the aftermath is still with us both economically and politically. 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 →
A useful piece by Geoff Tily, senior economist at the UK’s Trades Union Congress, on the persistent imbalances in the economy. In brief, growth remains too reliant on debt-fueled consumer spending, and private investment has been very weak, and even declined overall in 2016. If these trends continue, productivity growth will also continue to be weak, as it is productive investment that drives it.
While the employment performance has been impressive since the end of the recession, wages have largely stagnated. The prospects for a growing economy seem to rest on rising employment, and since the employment rate is already high, this will ultimately require continued substantial net immigration. 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 →
Oxford Professor Simon Wren-Lewis blogs here that UK households are set to lose out from the effects of the vote for Brexit over the next few years due to slowing growth in overall income. This is according to recent Bank of England forecasts for the UK economy.
While overall growth in GDP is forecast to be relatively strong compared to other rich nations, average growth in household income may be zero or even negative during this period.
This is due to the sharp fall in the value of the pound, which makes imports more expensive, and is already contributing to a rise in inflation.
Higher inflation means that a typical consumption basket is more expensive than otherwise, and this reduces real household incomes, other things being equal.
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.