Saturday, April 19, 2014
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The German Scapegoat

BRUSSELS – Could Germany, which accounts for 1% of the world’s population and less than 5% of its GDP, actually be responsible for the sorry state of the global economy? The US Treasury Department started the chorus with a report on currency manipulators that criticized Germany’s current-account surplus. The European Commission added its voice last month, when it published its scorecard on macroeconomic imbalances and called for an in-depth analysis of the German surplus.

The emphasis on Germany seems much more justified within the context of Europe. But, even there, Germany represents less than 30% of eurozone GDP (and less than one-quarter of output in the EU as a whole). Germany is important but not dominant.

This focus on Germany also overlooks the fact that the country represents just the tip of a Teutonic iceberg: All northern European countries with a Germanic language are running a current-account surplus. Indeed, the Netherlands, Switzerland, Sweden, and Norway are all running surpluses that are larger as a proportion of GDP than Germany’s.

These small countries’ combined annual external surplus is more than $250 billion, slightly more than that of Germany alone. Moreover, their surpluses have been more persistent than those of Germany: ten years ago, Germany had a current-account deficit, while its linguistic kin were already running surpluses of a similar size as today. Over the last decade, this group of small countries has recorded a cumulative surplus larger than even that of China.

Are all of these countries guilty of mercantilist policies? Have all of them engaged in competitive wage restraint?

Much of the facile policy advice provided to correct the German surplus seems misguided when one examines the persistent surpluses of this diverse group of countries. Some, like Germany, are in the eurozone (the Netherlands); others have pegged their currency to the euro unilaterally (Switzerland), while still others maintain a floating exchange rate (Sweden).

Within the eurozone, the counterpart to the German surpluses used to be the deficits of the peripheral countries (mostly Spain, but also Portugal and Greece). This is no longer the case.

Today, the counterpart to Teutonic excess saving is “Anglo-Saxon” dissaving: most English-language countries are running current-account deficits (and have been doing so for some time). Together, the sum of the current-account deficits of the United States, the United Kingdom, and major Commonwealth countries amounts to more than $800 billion, or roughly 60% of the global total of all external deficits.

It is not surprising that national policymakers (and media) in major Anglophone countries are complaining about the German surplus. But action by Germany alone will have little impact on these countries’ fortunes, because their deficits are much larger.

The key question is who would benefit if Germany started to import more. The peripheral eurozone countries account for only about 10% of German imports, compared to almost 40% for the other surplus countries in northern Europe. Stronger domestic demand in Germany would thus benefit these other surplus countries (with low unemployment) four times more than the peripheral countries (with much higher unemployment). Other countries with a structural surplus, including Russia, China, and Japan, would also benefit more from stronger German demand than Spain or Greece would.

The discussion of the German surplus thus confuses the issues in two ways. First, though the German economy and its surplus loom large in the context of Europe, an adjustment by Germany alone would benefit the eurozone periphery rather little. Second, in the global context, adjustment by Germany alone would benefit many countries only a little, while other surplus countries would benefit disproportionally. Adjustment by all northern European countries would have double the impact of any expansion of demand by Germany alone, owing to the high degree of integration among the “Teutonic” countries.

This applies to both the European and global contexts. Coordination within the eurozone (for example, through the excessive-imbalance procedure, which might now be applied to Germany) seems largely insufficient if the aim is to help the peripheral countries. At the global level, the Anglophone deficit countries, too, would benefit much more if all of northern Europe increased its domestic demand.

Germany has been an attractive target for external-deficit countries in Europe and beyond. But beating up on Germany alone appears to be the wrong way to get results.

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  1. CommentedHerbert Walter

    One point that is missed here: the German current account is nowadays largely locked into Bundesbank transfers to the ECB. It is simply not available for boosting domestic demand.

    The ECB then funds banking systems in euro crisis countries at very low interest rates. This means that the German current surplus is already employed to the benefit of southern European countries.

    Therefore, the US Treasury is completely wrong in its criticism. Official channels in the eurozone prevent a boost in German domestic spending. In order to reverse this situation, Germany would have to boycott Bundesbank transfers to the ECB and see the banking systems of southern Europe collapse. Does the US Treasury really advocate such as policy?

  2. CommentedGerald Silverberg

    While this is an interesting take on the rebalancing issue, it overlooks the fact that Switzerland, Sweden, and Norway are outside of the Eurozone and in principle have floating exchange rates, and the Netherlands, while inside the Eurozone, is a fifth of the size of Germany and has always voted until now as a loyal German satellite. Thus Germany is calling the tune in EZ austerity, rebalancing, bailout, mutualization of risk (banking union, OMT...) policies with at most the ECB as a monetary counterweight, and more generally in the policies of creditors vis-a-vis debtors.

  3. CommentedWalter Gingery

    Let's see: Germany's surplus plus that of the other "Teutonic" nations comes to $500 billion. So, if Germany and the others took 10% of their surplus (the share of their imports from the peripheral countries) and spent it in Spain, etc., that would mean $50 billion -- per year!-- in new income there. So what's the hold-up?
    Germany et al. will have to re-think the policies and institutional constraints that affect the relationship between consumption levels and GDP. Which means that Angela et al. will have to get off their butts and go to work.

  4. CommentedFrancesco Saraceno

    I do believe that the article substantially underestimates the impact that a change of German attitutde would have on the eurozone economy: http://fsaraceno.wordpress.com/2013/12/06/small-germany/

  5. CommentedCliff Economics

    Structural factors such as demographics distinguish Germany from many Anglosaxon countries, generating what has been termed a structural current account surplus: see http://cliffeconomics.blogspot.com/2013/11/germanys-current-account-surplus.html
    Yet, when looking at who "benefits" by how much it is necessary to also consider second round effects---the countries who export inputs to countries importing to Germany.

  6. CommentedCarol Maczinsky

    The point is apparently that Germany carries the political weight and stamina to insist on agreed rules. A surplus is not good but a minor issue, as the US example shows trade balance does not really matter. What matters is that trust in the Southern group is restored and sound governance enacted. Scapegoating is a way to distract from enacting the painstaking reforms.

  7. CommentedStefan Wiesendanger

    The thinking that a surplus is "good" and "helpful" to the country that has it is by itself mercantilist. A surplus may be good In certain conditions and in view of certain goals, in other cases or in view of alternate goals not. It all depends. One country saving for the future while another dissaves due to an ageing population? What's pathological about this? Refusing to waste a chance find of natural resources on domestic over-investment à la Brunei but rather invest it in a global SWF? Who can blame the Norvegians? A country with a literal age pyramid instead of a Western mushroom, borrowing to invest in a local infrastructure for future generations - why complain? Good and bad are elusive at the macro level, the closer you look. It gets even more confusing when you start looking into the micro level as we do in the next paragraph.

    What is certain to be deceptive is to think of a macroeconomic variable such as a current account surplus as something that can be managed by policy. Rather than an input dial that can be set to any value at will, it is an output produced by a great many factors, like the temperature of today's weather depends on a huge amount of input variables. In economic terms, the surplus is much rather an aggregate, the result of millions of decisions by millions of individuals, all with their own reasons and preferences. How can we change it in a top-down manner? How many olives can a German eat? - Of course, elements of the end result *are* accessible to policy, there *are* certain things that can be done at the macro level to rebalance. But most of these things concern reforms in the deficit countries. What the Germans can do, namely ending wage restraint to distribute the fruit of their work more evenly, they are doing already.

    After rejecting the idea that macroeconomic variables can be directly managed, mentally likening them not to dials but to indicators, I can't help but notice that they are normally used in much too coarse a manner even serve as indicators. Much more insight can be generated by looking into the fine print (but still at the macro level). For example, are we talking about a trade surplus, an export surplus (including services) or a current account surplus? What is the role of pension schemes (the fully-funded schemes of NL and CH ballooned to assets of 2 trn$ over the past 50 years but will peak soon due to a reversing population trend). How high are remittances? How do undistributed earnings of foreign-owned companies affect the current account? Capital gains? Taxes? Remittances?

    In summary, we have made three points:
    - the identities that a surplus = good and a deficit = bad do not hold, it depends on the circumstances and on the goals (and therefore *on the personal preferences of the speaker!*)
    - macroeconomic aggregates are just that, aggregates. They are not accessible to policy measures since they are the result of millions of personal decisions
    - the power to explain of macroeconomic variables can be greatly enhanced by going into more detail than is usually done

  8. CommentedConversionCourses ConversionCourses

    While admittedly, collective action by the 'Teutonic countries" to boost demand would address imbalances to a greater extent that should Germany take action alone, the real issue which is of concern alludes the authors attention. That being deflation is harder to manage and more costly in the face of anemic inflation in Germany. Further, any analysis of Germany's deviation to the ECB target rate of inflation is conveniently ignored. The corollary being that we should expect further futile retaliatory 'beggar-thy-neighbor' strategies from the periphery while they kill off what remains of their domestic economies. Not to mention the fate of the Euro if mutually assured deflation persists in gripping the mentality of "Teutonic countries".

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