A recent US Treasury report criticized Germany’s large and sustained external surpluses as holding back global economic recovery. The justification for this attack is that German external surpluses must detract from growth elsewhere as other countries must have a matching deficit to balance the global books. The surplus is said to be because Germans are not consuming and importing enough of others’ goods and services. So the German surplus hits the recovery prospects elsewhere.
But these claims are nonsense. Germany’s domestic demand is not deficient compared with other economies. The problem lies with the lack of competitiveness and excessive leverage in other economies, which are reducing domestic demand there. The idea that the eurozone would do better if Germans consumed Greek or Italian cars rather than their own defies logic. It would substitute the inferior for the superlative. No economy gets richer doing that.
In fact, Germany’s high savings rate, budget surplus and focus on fiscal discipline are prerequisites for economic recovery in the eurozone. They enable Germany to be the anchor of EMU stability. If Germany’s prudent domestic policy, and thus its external surpluses, were reversed, what would be the impact on the power of its guarantee of peripheral EMU funding programmes? Without that German anchor, Italian government bonds would yield 6%, not 4% as now, and the effect on the Italian economy would make Greece look like the trailer before the main feature of a horror movie.
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German manufacturing is among the most internationalized sectors in the world, with 25% of its production located abroad. This is because German wage costs are high. If productivity can be matched in lower-wage economies, German manufacturing will move to those economies. It is no accident that Germany accounts for a big slug of Chinese automobile production, or that Skoda and Seat are great global car producers not located in Germany but producing German-engineered cars at lower prices. If the EMU periphery can reform its labour markets, German inward FDI would become a big boost to growth.
Before the global crisis, labour rates in the periphery became increasingly uncompetitive as the economic boom created low-productivity jobs in unreformed labour markets. Households and corporates in weaker eurozone states spent way beyond their means, borrowing recklessly from tomorrow to consume today. Then, with Faustian inevitability, came the day of reckoning. From the peak of excess in 2007/08, domestic demand of peripheral economies has contracted by 7.5%, resulting in nine to 11 percentage points of GDP improvement in their current accounts, which are now in balance.
As the periphery has contracted its external deficits, Germany’s surplus with the periphery has also narrowed. Germany now runs a collective trade surplus of just 0.5% of its GDP with the periphery; while that with the eurozone as a whole has dropped from 4.8% of GDP in 2007 to 2.2% of GDP.
Germany has also successfully reoriented its export machine away from the eurozone towards other parts of the world. The 2.5 percentage points of GDP decline in its trade surplus with other eurozone members has been broadly offset by 2 percentage points of GDP improvement in its trade balance elsewhere – mainly vis-à-vis Asia and the US. The result is that 68% of Germany’s trade surplus is now generated outside the eurozone, up from just one-fifth at the end of 2000.
Market share
So I suspect that the US Treasury’s complaints are focused more on Germany’s ability to grab global market share at US expense than from any great concern about the pace of the global recovery.
Is the US complaint about slack German domestic demand justified? Private consumption has made a positive contribution to German real GDP growth in each of the last 14 quarters and provided a bigger net boost than the external sector.
The complex reality is that Germany’s relative export success is not built on beggar-thy-neighbour policies or on the imposition of unnecessary austerity on its neighbours. It is founded domestically on higher productivity, better investment and substantial labour market reforms.
The US complaint cannot be based realistically on the Keynesian concept of demand and supply, ignoring capital flows, comparative advantage and competitiveness. Reality is far more complex. Increased granularity is helpful in charting the appropriate policy route. Superficial and politically inspired dogmatic Keynesian clichés by the US Treasury are not.