Blog Post

Blogs review: The deflationary bias of Germany’s current account

What’s at stake: For the first time the U.S. Treasury semi-annual report to “Congress on International Economic and Exchange Rate Policies” blamed Germany explicitly for its continuous current account surpluses, which have resulted into “a deflationary bias for the euro area, as well as for the world economy.” The response of the German finance ministry that Germany’s current account surplus offers “no reason for concern” has failed to convince the economics blogosphere, which overwhelmingly shares the views of the U.S. Treasury on this issue.

By: Date: November 6, 2013

What’s at stake: For the first time the U.S. Treasury semi-annual report to “Congress on International Economic and Exchange Rate Policies” blamed Germany explicitly for its continuous current account surpluses, which have resulted into “a deflationary bias for the euro area, as well as for the world economy.” The response of the German finance ministry that Germany’s current account surplus offers “no reason for concern” has failed to convince the economics blogosphere, which overwhelmingly shares the views of the U.S. Treasury on this issue.

Current Account = Savings – Investment

Matthew Klein writes that the claim that “the trade surpluses reflect the strong competitiveness of the German economy and the international demand for quality products from Germany” is just wrong. Trade balances simply reflect the balance between domestic production and consumption. The special appeal of German products should show up in the volume of its exports, not the difference between its exports and its imports. 

Paul Krugman writes that there’s a tendency, in discussing Germany’s position in world trade, to assume that massive surpluses have always been the German norm — that the country’s high-quality products have always fueled an export engine that inevitably sold much more abroad than Germans bought. But it’s not true. There was an earlier period of surpluses in the mid-80s, largely the counterpart of America’s Reagan-era deficits. But Germany didn’t run a surplus at all in the 90s. Its big move came with the introduction of the euro, and corresponding huge capital flows to the European periphery.

The paradox of thrift in the world economy

Ryan Avent writes that that a CA surplus wouldn’t normally be a problem. German surpluses would usually generate appreciation in the German currency, which would eventually reduce the surplus. At the same time, a shortfall in external demand in other economies could simply be offset by higher internal demand. But Germany doesn’t have a currency to appreciate; it shares the euro with lots of other economies. And at the moment because rich-world economies are chronically short of demand, and one component of demand is external demand. Germany’s large current-account surplus means that it is enjoying a large chunk of the available external demand across the rich world.

Francesco Saraceno writes that the generalization of the German model to the whole eurozone is leading to increasing current account surpluses. Therefore, this is not simply a European problem anymore since the eurozone has moved from a substantial balance to a small but not negligible (1.9%) surplus. The eurozone as a whole today is a net saver, and therefore contributes to depress aggregate demand at the global level. Martin Wolf adds that the shift from deficit towards surplus is forecast by the IMF to be 3.3 per cent of eurozone GDP between 2008 and 2015.

A test for the macroeconomic imbalances procedure

Charlemagne writes that under the so-called macroeconomic imbalances procedure, a current-account deficit greater than 4% of GDP can trigger an alert, possibly followed by “in-depth analysis” carried out by the European Commission, policy recommendations and, ultimately, the threat of sanctions. Yet a country’s surplus must rise above 6% of GDP before Eurocrats start to take notice. Germany was let off last year because its surplus (averaged over three years) was a shade below the warning threshold and was expected to shrink. Now statisticians have revised that figure to 6.1%, and it has grown since then. It stood at 7% in 2012. The test for the Commission will come later this month, when the commission issues its latest economic forecasts and launches the “European semester”, an annual cycle of economic and budgetary assessments that culminate in the spring with “country-specific recommendations”. 

Alexander Jung, Christian Reiermann and Gregor Peter Schmitz (HT Mark Thoma) write that suggestions that the Germans stimulate imports are unrealistic as the government also lacks important tools to influence them. Germans will buy more foreign goods if they earn more money. But this isn’t something the government can dictate since, in Germany, employers and trade unions negotiate wage levels without any government interference.

The reasons behind a failure of analysis

Twenty-Cent Paradigms (HT Capital Ebbs and Flows) writes that the difficulty, in part, comes from the moralistic connotations of some of the language used to discuss international flows. That is, Germany is running a current account "surplus" which results from a high level of "savings", and saving and having a surplus sound like the results of virtuous behavior (while having deficits and low savings connote profligacy). So the idea that German economic policy is part of the problem is a hard sell to politicians, commentators and voters (and even some economists who should know better). But it takes two to have an imbalance.

Simon Wren-Lewis writes that the problem is not with Germany, but with the macroeconomic myths that seem to be so deeply embedded in current policy. There are three key myths that are leading German policy making astray. Myth 1: The EZ crisis stemmed from fiscal irresponsibility in the periphery EZ countries, and that the crisis can only be solved by reversing this through harsh austerity. Myth 2: An anti-Keynesian view that fiscal policy has no place in managing aggregate demand, which can be safely left in the hands of the ECB as long as the ECB sticks to its job of keeping inflation below 2%. Myth 3: To be independent, central banks must never buy government debt, as this indicates fiscal dominance. Although these three myths have a particular Ordoliberal flavour, they are not so very different from similar myths expounded by politicians and the occasional economist in the US, the UK and elsewhere in Europe. The myths are the problem.  

France then, Germany now

Paul Krugman argues that Germany is playing a somewhat similar role than France in the Great Depression, which soaked up a huge proportion of the world’s gold reserves in 1930-31. The French weren’t evil or malicious here — they were just adhering to their hard-money ideology in an environment where that had terrible adverse effects on other countries. Germany’s role is not as drastic as that of France in the 1930s, but has less excuse. For Germany is an economic hegemon in a way France never was.

Uneasy Money writes that undervaluation of the franc would have done no permanent damage to the world economy if the Bank of France had not used the resulting inflow of foreign exchange to accumulate gold, cashing in sterling- and dollar-denominated financial assets for gold. Ryan Avent writes that the whole gold standard analogy and all the complaining about Germany is a red herring, because the ECB can create euros at will and can therefore banish any deflationary pressure emerging from Germany. In this crazy world of too-little demand, Germany deserves criticism for its surplus. But given that rich-world central banks could get printing and solve the problem of too-little demand outright, that criticism could be more usefully allocated elsewhere.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Topics

Tags

Comments

Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Blaming the Fed for the Great Recession

What’s at stake: Following an article in the New York Times by David Beckworth and Ramesh Ponnuru, the conversation on the blogosphere was dominated this week by the question of whether the Fed actually caused the Great Recession. While not mainstream, this narrative recently received a boost as Ted Cruz, a Republican candidate for the White House, championed it.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: February 1, 2016
Read article More on this topic

Blog Post

IMG_20151009_103117 (3)
Pia Hüttl

Lost in assumptions: assessing the economic impact of migrants

What’s at stake: Many research institutes have estimated the economic impact of migrants, in particular regarding fiscal budgets and the labour market. These studies often give contradictory results. This blogs review looks at the different assumptions and approaches behind these results.

By: Nuria Boot and Pia Hüttl Topic: European Macroeconomics & Governance Date: January 18, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The use of models by policymakers

What’s at stake: The latest discussions on the blogosphere have been dominated by a back and forth trialogue between Larry Summers, Paul Krugman and Brad DeLong on the appropriate use of models as policy guides. While they all agree that the Fed’s decision to raise rates was a mistake, they disagree on the intellectual reasons behind it.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: January 11, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Finland and asymmetric shocks

What’s at stake: Finland exemplifies the difficulty of dealing with asymmetric shocks within a Monetary Union as the Finnish economy has struggled to recover from a series of idiosyncratic shocks – the decline of Nokia, the obsolescence of the timber industry, and the fallout of the Russian crisis.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: December 21, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The predictability of political extremism

What’s at stake: The rise of the extreme right in the latest French election has mostly been treated as surprising or reflecting special circumstances like the November 13 Paris attacks. But a large literature linking extreme right votes to persisting depressed economic conditions suggests that longer run factors are at play.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: December 14, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The puzzle of technical dis-employment and productivity slowdown

What’s at stake: Larry Summers made an important speech a few weeks ago at a Peterson Institute conference on the productivity slowdown arguing it is hard to see how recent technical change could both be a major source of dis-employment and not be associated with productivity improvement.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: December 7, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Unlearning economic paradigms

What’s at stake: Both the crisis, its aftermath, and the empirical econ revolution have changed our understanding of economics. Conventional wisdoms about the supply side of the economy, the length of the short run, or the international adjustment process are all being challenged. Even conventional microeconomic wisdoms about the role of minimum wages and welfare programs are being challenged by new data raising questions about how economics should be taught and used to guide policymaking.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: November 30, 2015
Read article More on this topic More by this author

Blog Post

augustin_lagarde

The economic debates behind COP21

What’s at stake: France will chair and host the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) at the end of the year. While the scientific community has reached a consensus that climate-warming trends are very likely due to human activities, the discussion about how to address is mired in huge political disagreements.

By: Augustin Lagarde Topic: Energy & Climate Date: November 23, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The persistence of slow growth

What’s at stake: The persistence of slow economic growth in the Great Recession has been puzzling. Two recent papers have tried to present a coherent framework for understanding this phenomenon. The first paper argues that we may have underestimated the importance of hysterisis effects. The second paper argues the global safe asset shortage cannot be resolved by lower world interest rates once we reach the zero lower bound. It is instead dissipated by a world recession that rebalances global asset markets.

By: Jérémie Cohen-Setton Topic: Global Economics & Governance Date: November 16, 2015
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

The uncertain decline of the natural rate of interest

What’s at stake: Controversies over whether and by how much the natural rate of interest – the rate compatible with full employment and stable prices – has declined in the past few years has shaped views about the pace and extent to which central banks should normalize policy rates.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: November 9, 2015
Read article More by this author

Blog Post

Jérémie Cohen-Setton

QE and investment

What’s at stake: Quantitative Easing has been criticized for generating inflation risks, financial stability risks, and distributional risks. The newest criticism from Kevin Warsh, a former Fed Governor, and the 2001 Nobel Prize laureate Michael Spence is that QE actually reduced investment!

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance, Global Economics & Governance Date: November 2, 2015
Read article More on this topic

Blog Post

Uuriintuya Batsaikhan
Pia Hüttl

The global debt overhang

What’s at stake: Seven years after the financial crisis, recovery is still weak in most parts of the global economy. The general debt overhang across sectors, which was not reduced in the last years, has often been cited as as the main factor weighing on global growth and inflation.

By: Uuriintuya Batsaikhan and Pia Hüttl Topic: Global Economics & Governance Date: October 26, 2015
Load more posts