Germany and the laws of surplus and demand
The Greeks may need to spend less, but the Germans need to spend more too if the eurozone is to be put on a firmer footing, writes Philip Whyte
Greece’s recent fiscal travails have, rather unexpectedly, thrown the spotlight on Germany’s current-account surplus. In mid-March, France’s finance minister, Christine Lagarde, urged Germany to do more to boost domestic demand – a call echoed by European Commission President, José Manuel Barroso. The German government and media are bemused and indignant. How can it be, they ask, that corruption and profligacy in Greece has turned into a trial of German discipline and rectitude? Anyway, what right do French politicians – and, for that matter, Anglo-Saxon commentators – have to lecture Germany? Wouldn’t they be better advised attending to their own countries’ manifold economic problems?
On one thing, everyone agrees. Germany’s current-account surplus is vast. In 2009, it amounted to $169 billion – or 5.2 percent of the country's GDP. In absolute terms, this was the world’s second largest current-account surplus after China’s. Measured as a share of GDP, Germany’s surplus was even larger than China’s. At issue is what these current-account surpluses represent – and what, if anything, the countries that run them should do about them. Many in Germany believe that their country’s external surplus reflects the "competitiveness" of its economy. They have likened Germany to a country holding top spot in a football league. Other countries, they think, must simply learn to compete more effectively.
A few years back, a former chief economist of the OECD, David Henderson, coined the term “do-it-yourself (DIY) economics” to describe “firmly held intuitive economic ideas and beliefs which owe little or nothing to textbooks, treatises or the evidence of economic history”. DIY economics, Henderson believed, was ubiquitous. It was as likely to inform the world view of political figures, top civil servants, chief executives, commentators and eminent professors as that of the general public. DIY economics remains as prevalent as ever, as recent German responses to Lagarde’s intervention surely prove. These responses are permeated with assumptions and beliefs that sound superficially plausible, but are just flat wrong.
One of the most pernicious is the tendency to think of countries as if they were companies, and of trade balances as if they were profit and loss accounts. Many people think that Germany is like Volkswagen, and that its trade surplus shows it is winning the battle for global market share. But it takes only a moment’s reflection to realise why this is an absurd way of thinking about the matter. One of the world’s most productive economies, the US, runs a huge trade deficit, while some of the most dysfunctional and least productive, like the Democratic Republic of Congo (DRC), run surpluses. No one is surely suggesting that the US should make itself more "competitive" by emulating the DRC!
Far from being signs of external strength, countries’ current-account positions can be symptoms of domestic weakness. And here’s the rub. Many of the countries that have run large current-account surpluses over the past decade have suffered from weak domestic demand. One of these countries is Germany. If it had been a closed economy, it would have been in a prolonged slump. As it was, Germany was rescued by the profligacy of foreigners. Between 1999 and 2007, 70 percent of the growth in its GDP was accounted for by net exports. But the foreigners that kept the German economy afloat are now mired in debt. In many countries, households and governments are over-extended and need to "deleverage".
Germany rightly wants deficit countries to become more responsible. But the much-needed rebalancing in the deficit countries will not be possible without some parallel rebalancing in surplus countries like Germany. No one is asking, as German Finance Minister Wolfgang Schäuble has claimed, that Germany reduce the quality of its exports so that other countries can "compete" (a ludicrous move that would only lower the living standards of foreigners who bought German goods). Nor is anyone asking Germany to show Anglo-American levels of profligacy. But Germany must stop fetishising its trade surplus and accept that the chronic weakness of its domestic demand is a problem as much for itself as for the world economy.
07/04/2010