I have blogged a few times on Germany’s current account surplus and how it distorts the global economy. The surplus is currently the world’s largest in absolute terms at US$350bn which is 8.5% of Germany’s GDP. Recently the IMF called for a radical shift in Germany’s trade policy before it provokes a protectionist backlash in the USA.
The fact that Germany is selling so much more than it is buying redirects demand from other countries around the world, reducing output and employment outside Germany at a time at which monetary policy in many countries has become ineffective. Furthermore the IMF has suggested that Germany should be investing more in public infrastructure to soak up excess savings and stimulate more demand in its own economy and therefore redirect spending. The underlying criticism is that Germany should stop trying to drive down its debt – German debt ratio has fallen from 81% of GDP to 60%.
A significant advantage that Germany has is that it is part of the euro currency. If Germany still had the Deutschmark the trade surplus would have no doubt increased the value of its currency making exports more expensive and imports cheaper. The value of the euro is dependent on the strength of other countries with the currency and the European Central Bank interest rate. Interest rates being -0.4% are a disguised way of holding down the value of the euro (exports cheaper and imports more expensive) and seen by some as bad etiquette for a currency bloc running surpluses near US$430bn – three times that of China.
The German viewpoint
- Germany says that it requires huge savings to prepare for the oncoming aging population.
They deemed it a fundamental error to boost spending of cut or cut taxes (expansionary fiscal policy) at this late stage of the business cycle, warning that a fiscal stimulus would destabilise Germany whilst not doing much to help the rest of Europe or the global economy.
- The German surplus is a result of millions of decisions in Germany and abroad – German products are very high quality and reasonably priced so therefore there is more demand.
Germany needs a safety-buffer with the increasing dependency ratio as by 2020 the ratio will double to one retiree to one worker.
- The euro is a free floating currency and there is no manipulation of the exchange rate. Its value reflects the strength of eurozone countries.
Policies to reduce the surplus.
Germany has little control over the value of the common currency, but it has several policy tools at its disposal to reduce its surplus.
- Increase spending in infrastructure
- Raising the wages of workers
- Increase domestic spending.
Source: Daily Telegraph – Germany rejects IMF cal for radical shift in trade policy – Friday 19th January 2018