It didn’t take long for a discussion about Germany’s massive trade surplus to descend into crude metaphors. A model student, Manfred Bergmann of the European Commission offered, has a better chance of making friends if they help other struggling students. That may be true, responded Christopher Schmidt of the German government’s economic advisory council, but in this case it’s more like being asked to do the homework yourself so that others can get drunk at the high-school party.
This is what happens when you’ve been arguing for years about Germany’s surplus – with little sign of a resolution. The argument was restarted this week as new data showed the country’s 2017 current-account surplus, at $287 billion, was the highest in the world for the second year in a row. German policymakers, in their defense, will point to the fact that the surplus fell slightly in relative terms to 8.1 percent of GDP (see graphic). But that’s hardly going to be enough to silence the skeptics who want the government to do more.
If there’s going to be a fight anyway, why not stir the pot by putting all the main protagonists in a room together? That seemed to be the motivation behind an event hosted Thursday by Germany’s central bank, the Bundesbank, and the International Monetary Fund in Frankfurt, where Messrs. Bergmann and Schmidt butted heads.
“Germany is not an island.”
The battle lines in the debate have long been drawn. A range of international institutions, as well as the US government and many (non-German) economists believe Germany should spend and invest more domestically to reduce its current account surpluses. Importing more goods, they argue, would help other economies as well. In the words of Christine Lagarde, managing director of the IMF: “Germany is not an island.” Maurice Obstfeld, the IMF’s chief economist, added for good measure that a more balanced account would also benefit Germany’s domestic economy.
The usual retort from Germany is that other countries should simply get more competitive – or bring their own excessive spending habits more in line with Germany’s frugal style. “The quality of schools depends on the teachers, not on the school toilets,” quipped Lars Feld, a Frankfurt-based professor and key government advisor, who argues Berlin should focus on reducing its debt burden rather than boost investment.
Jens Weidmann, president of Bundesbank, did his best to show a bit of understanding for both sides – essentially by arguing that, while the trade surplus might be a problem, the matter is out of Berlin’s hands. “The surplus is the result of many individual decisions made by consumers and companies,” he said. Even increasing government spending would only have a “minimal effect” on other European countries, he said.
At the same time, Mr. Weidmann empathized with foreign critics. If the surplus is the result of excess saving over investment, then he suggested, the government should shift money to things that can stimulate long-term growth, such as education and infrastructure spending, for example through the expansion of broadband networks.
The discussion is complicated by the fact that surpluses can be explained in various ways, which allow for different conclusions. “Too many exports and too few imports” is just one of the ways a surplus develops, and explains the accumulation of assets abroad, for example in the form of loans to foreign customers.
The other side of the coin is a glut of savings and a lack of investment within Germany, which in turn means that assets are being built up abroad instead of domestically. Well-meaning critics try to point out that Germany has lost out in the past, for example, by taking risky bets on foreign investments ahead of the financial crisis. Better to invest back home, they say. For Germans this smacks of self-interest, as other countries no doubt hope the money will be spent on imports. But then, Germany’s widespread refusal to care about the global imbalance smacks of self-interest for its critics, too.
If there’s a silver lining, it’s that economists on both sides of the spectrum tend to agree on the problem. In some cases they even agree the situation is getting better. Where the deal falls apart, is on where to take it from here.
High current account surpluses could prompt other governments (Donald Trump for example) to retaliate.
Economists Peter Bofinger (who has close links with trade unions) and Michael Hüther (who is close to employers) have agreed that wage growth has gained momentum in Germany, even if it remains staggeringly low. The two were also largely in agreement that wages are being held back by immigration from other EU countries as well as structural changes, as Germany moves from an industrial to a service economy, which is leading to a decline in the importance of trade unions.
Maurice Obstfeld of the IMF and Clemens Fuest of the Ifo Institute for Economic Research also pointed out that the German government and businesses in particular have been saving more of their earnings in the last few years, while household spending has stayed pretty level. Mr. Obstfeld’s conclusion is that this benefits the rich, since they tend to own the companies. Better to find ways to encourage more company spending. Mr. Fuest suggested that state savings will benefit pensions in the long term “and thus the entire population” instead, as the country’s labor force shrinks.
To be sure, this isn’t just about Germany. Mr. Feld has also pushed for other European countries to save more, rather than demand Germany save less. While the bickering continues, it might be taken out of Germany’s hands. Mr. Obstfeld warned that high current account surpluses could prompt other governments (Donald Trump for example) to retaliate. If there’s one thing that all sides can agree on, it’s that a trade war helps no-one.
Frank Wiebe and Jan Mallien cover monetary policy and economics for Handelsblatt and are based in Düsseldorf. Christopher Cermak and Claire Corlett adapted this article into English for Handelsblatt Global. To contact the authors: Wiebe@handelsblatt.com and firstname.lastname@example.org