Jason Furman, the chief economics adviser to U.S President Barack Obama, is in Europe this week to cajole, debate and encourage Europe to play its part in boosting global growth.
And part of that involves telling Germay that its current account surplus is not good for either the country or the world economy.
In an exclusive interview with Handelsblatt, Mr. Furman said the German current account surplus “is not a replicable model for all of the economies of the world. And it may not be a sustainable model for Germany even in a world of slowing demand.”
He added: “I think Germany recognizes the importance of raising investment as a share of GDP – that is something that fiscal tools, among others, could help achieve. Stronger wage growth to lead to stronger consumption growth would also help lower the current account surplus and expand domestic demand and have positive spillovers for the global economy.”
The U.S. government has been openly critical of Germany’s trade surplus and argued for years that the countries should do more to boost domestic demand.
Data released this week shows that Germany’s trade surplus is now at a record high, boosted by German industrial output, which rose strongly in the first quarter, and soaring exports.
Mr. Furman pointed out that despite a strong economy, investment as a share of GDP is relatively low in Germany and that the country needed to find ways to invest.
“Most countries in the world, and I don’t think Germany is an exception, do have potential for additional infrastructure investment, additional projects,” he said.
“In the case of inequality, the United States has a more severe problem than any of the other advanced economies.”
“There is also another question, and I think it’s a question important to be asking, is what can be done to encourage businesses to raise their investment. Because the slowdown of capital formation in Germany is the most important reason why productivity growth has slowed in Germany, just like in the United States.”
Mr. Furman said Europe had become too fixated on austerity as the antidote to the financial crisis and had been inconsistent in its fiscal policy.
“Monetary policy has also not been as consistently expansionary,” he said.
He went on to say that the U.S. believes that the European Union should consider restructuring Greek debt as there is no other sustainable solution to the country’s problems. The line is one backed by the IMF, but bitterly opposed by the German government. He argues that Greece must implement structural reforms and formulate a realistic fiscal policy, but added “it can often be hard for structural policies to succeed when the macroeconomic environment is unfavorable to their success.”
Speaking about the world economy, Mr. Furman said that the trans-atlantic trade deal currently being negotiated between the E.U. and the U.S. would boost global growth. The proposed pact, called TTIP, has sparked protests in Europe, where many believe the new rules will lower consumer standards in Europe, and allow large companies to overrule national laws.
Mr. Furman said that was a “misleading argument.”
“The United States has very strong consumer protection laws, Europe has very strong consumer protection laws, and nothing in TTIP would undermine those,” he said.
“I think in this trade agreement, there is an improvement of what an economist might call static efficiency – people do more of what they’re good at. That would help. What’s even more important is the degree that leads to greater innovation and productivity growth by encouraging specialization, expanding the size of markets, increasing competition and the pressure that has for innovation. I think it’s quite promising in those regards.”
He said America’s trans-Pacific Pact with countries like Japan “showed what a modern, high-standards trade agreement would look like, one that doesn’t just lower tariffs and non-tariff barriers, but also has high standards in terms of labor, the environment, net neutrality, state-owned enterprises, reforming dispute settlement.”
And while Mr. Furman refused outright to comment on Donald Trump and the possible effect his nationalistic, protectionist policies may have on the U.S. economy, he admitted that sluggish wage growth had played a large part in American people’s dissatisfaction with the main political parties.
“In the case of inequality, the United States has a more severe problem than any of the other advanced economies” he said.
“Income growth took a big blow in the recession and we haven’t fully recovered from it, so in that sense I think it’s quite understandable that people have genuine, legitimate concerns about the economy, and that’s why it’s really important to make further progress on wage gain,” he said.
“It’s also the case that to some degree people can view the economy through a political lens, and when they hear bad thing after bad thing that can affect the way they answer certain question about the economy.”
The IMF is encouraging the U.S. to raise the minimum wage, partly to reduce inequality, and Mr. Furman admitted that the idea made sense. “Past research in the United States has found little or no employment effect for increases in the minimum wage, a reasonable amount above where it is now, and the United States is among the lowest of the OECD countries in terms of its minimum wage,” he said.
The United States has also made no secret of the fact that it wants Great Britain to remain in the European Union. Britain will vote on membership of the E.U. in a too-close-to-call referendum on 23 June, and Mr. Obama flew to London in April to back Prime Minister David Cameron’s campaign to remain part of the E.U. Mr. Obama warned at the time that Britain would be “back of the queue” for signing any bilateral trade deals, as the U.S. preferred to deal with regional blocks, not individual nations.
Mr. Furman also said a British exit would create uncertainty to the global economy at a vulnerable time.
“I think you can debate whether Brexit would be a small, medium or large cost to the economy, but I don’t think you can debate the sign of a Brexit, which is certainly negative. The biggest consequences would be for the U.K., Europe would be second, but for the global economy as a whole, uncertainty and debate over how bad a shock to the economy it would be is not what we want right now,” he said.
But he said that overall, he was optimistic about the state of the world’s economy. There have been fears flaring up in the financial markets that there are excess savings, with very few profitable investments and interest rates close to zero, but Mr. Furman said he did not believe there was a huge threat on the horizon.
“I think we’re well past the moments of maximum peril that we’ve been in. You’ve seen steady and solid growth in the United States, you’ve seen growth in Europe pick up, you’ve seen receding concerns about terror risks from financial markets. I think at this stage, the biggest fear should be that slow growth breeds complacency and undermines the case for the vigorous actions that we need to take. I think that’s a bigger threat than a 2007-through-11-style crisis,” he said.
Moritz Koch has been Handelsblatt’s Washington correspondent since 2013. To contact the author: firstname.lastname@example.org.