MUNICH – The debate about global macroeconomic imbalances is increasingly focusing on Germany’s current-account surplus and economic policy. Despite the vitality of the German economic engine, and the role it plays in fueling growth and maintaining stability in the eurozone, criticism of the country’s massive external surplus is mounting. As the Economist put it recently, Germany “saves too much and spends too little,” making it “an awkward defender of free trade.”
So what is Germany to do? The answer depends on whether economics, or politics, is guiding the decision-making.
The current criticism, which provided what one observer called an “uneasy ambiance” at this month’s G20 summit in Hamburg, focuses on two claims. First, Germany is hurting itself by exporting too much and investing too little at home. Second, Germany withholds demand from the rest of the world, in particular the US. If Germany contributed more to global spending, according to this view, the economic recovery from the 2008 financial crisis would have been stronger.
But the truth is, there is no compelling economic reason for Germany to do anything differently. If Germany has any reason to change course, it is primarily for political reasons.
The first criticism – that Germany’s domestic spending has not kept pace with its investment needs – is a myth. Exposés about poorly built buildings and crumbling bridges are offered as evidence that thrift has overtaken reason. But the numbers tell a different story. From 2001 to 2005, for example, Germany’s average current-account surplus was 2.4% of GDP, and average domestic investment was just under 20% of GDP. During the five-year period that ended in 2016, the surplus climbed to 7.3% of GDP, but investment remained constant at 20%. (Germany’s domestic spending was significantly higher in the 1990s, but that was largely the result of German reunification, and was not sustainable.)
The surplus has surged for one reason: prudence. Germany faces the prospect of a fiscal crisis as its population ages and its workforce shrinks. It needs to prepare for a projected decline in pension contributions and growth in health-care costs. Whereas the public-sector deficit was 3% of GDP in the early 2000s, Germany runs a small surplus today, which is a perfectly reasonable reaction, as is the increase in private retirement savings. At the moment, it makes more sense to invest the additional savings abroad, because population aging in Germany limits the potential for useful investment at home, and other markets are growing faster.
Critics’ second point, that Germany is stingy with its global purchasing, is more complicated. Germany certainly could help struggling eurozone economies if it bought more of their goods and services. But more imports and a lower surplus would also drive up interest rates, which is bad for highly indebted countries.
In fiscal policy, as in national security, it is perfectly normal for a country to place its own interests ahead of others. But the global pressure might nonetheless move German Chancellor Angela Merkel for at least three reasons – all of them political, not economic.
First, Germany has a strong interest in international cooperation in many areas, from immigration to energy security. Making concessions on macroeconomic policy could lead to cooperation in other fields. For Merkel, a “Germany first” approach, akin to US President Donald Trump’s “America First” strategy, would be counterproductive.
Second, debtors rarely look upon their creditors with sympathy. Germany’s creditor position vis-à-vis other countries may lead to political conflicts, because the debtors have incentives to avoid repayment.
Third, the European Union’s Macroeconomic Imbalances Procedure, established to prevent destabilizing economic policies by individual member states, requires countries with a current-account surplus above 6% of GDP to make adjustments. Germany can hardly expect other countries to comply with EU rules if it ignores them itself.
Whether Merkel chooses to act remains to be seen, but there are plenty of options if she does. For example, Germany could try to stimulate domestic consumption through more rapid wage increases. But, aside from the minimum wage, the government does not set pay scales. And while raising the minimum wage would boost income for those who have jobs, it could also increase unemployment. As a result, overall consumption might even decline.
Another option would be to increase public spending in military procurement and infrastructure, though military procurement is a long-term process, and more infrastructure investment would be difficult at a time when the construction industry is running at full capacity. It would probably be easier to boost corporate investment, such as by introducing accelerated depreciation, tax credits to promote research and development, and more generous loss-offset provisions. Indeed, boosting domestic private investment through corporate tax reform seems the best option.
But, in terms of addressing global macroeconomic imbalances, Germany’s critics will be disappointed by such measures. Germany represents 4.4% of global GDP. So a reduction in its external surplus, even by as much as 2.5 percentage points from the current level of 8.5% of GDP, would have a minimal impact on the global economy. An increase in demand equal to 2.5% of German GDP would boost global demand by just 0.1%. The world would lose a scapegoat for its economic difficulties. Little else would change.