January 19, 2018
On the futility of discussing the German current account surplus
There is a ritual in the debate on German current account surpluses. Somebody - like the European Commission or the IMF - launches a criticism of German policies as encouraging the surpluses. Germany dismisses the criticism, always with the same arguments.
We have long ago come to the conclusion that Germany will only change policies if confronted with a clear and present threat of trade sanctions - even though it is also absolutely true that the surpluses are not the result of unfair trade practices. The causes of the surplus are complicated in nature, but there are domestic policies Germany could enact to increase investment and to reduce its large fiscal surplus, which would help curtail the continuously large current account surplus. Contrary to German protestations, its current account surplus is not falling.
The issue came up again in yesterday's discussion in Frankfurt at a joint conference between the Bundesbank and the IMF. The speakers went through the same old ritual as just described. Maurice Obstfeld noted that of Germany's 8.5% surplus, 4.5pp are beyond what can be justified by demographic developments. In other words, policies could reduce the surplus by at least 4pp. He called on fuelling public investments at a time when the economy was already showing signs of overheating. Jens Weidmann predictably dismissed the criticism, noting that the surplus is not the result of misaligned incentives or protectionistic measures. He presented a calculation according to which a 1pp increase in the fiscal balance would have virtually no effect on the current account.
What complicates the discussion is that the Germany's surplus is genuinely weird. It is the result of a dysfunctional monetary union, which has led to a permanent depression of Germany's real exchange rate. The two ways to solve the probleare m for Germany is to end the obsession with fiscal surpluses, or for the eurozone to break-up. Neither is very likely. In the absence of US trade sanctions - which, if they happen, will happen for the wrong reasons - we see no chance of the German surpluses coming down.
It is interesting to note how the German media reports this. Handelsblatt writes that the criticism of Germany is part of a mercantilist plot by others to gain advantages for themselves - by asking Germany to import more. We thought it was interesting too that the authors felt it necessary to explain the relation between the balance of imports and exports on the one hand and that of investment and savings on the other - a concept that is virtually unknown in the German public debate.