On 30 October the Office of International Affairs of the US Treasury issued
its customary semi-annual Report to Congress on “International
Economic and Exchange Rate Policies”, in consultation with the Fed’s Board of
Governors and IMF management and staff. The Report usually concentrates on
China bashing for the undervaluation of the renmimbi, and this time
is no exception: “The RMB is appreciating on a trade-weighted basis [by 6.6% on
a real effective basis], but not as fast or by as much as is needed [an
additional 5-10%]”. But the Report in addition vigorously criticizes Germany
for its record trade surplus, which is regarded as a brake on the recovery of
the Eurozone countries that experience a corresponding trade deficit and on
global growth.
Among the Report’s Key Findings (p.3):
“Within the euro area, countries with large and persistent surpluses need
to take action to boost domestic demand growth and shrink their surpluses.
Germany has maintained a large current account surplus throughout the euro area
financial crisis, and in 2012, Germany’s nominal current account surplus was
larger than that of China. Germany’s anemic pace of domestic demand growth and
dependence on exports have hampered rebalancing at a time when many other
euro-area countries have been under severe pressure to curb demand and compress
imports in order to promote adjustment. The net result has been a deflationary
bias for the euro area, as well as for the world economy.”
The main text of the report develops this proposition further: much of the
decline in global current account imbalances that occurred in recent years
reflects a demand contraction in deficit countries rather than strong domestic
demand growth in current account surplus countries. Germany in particular has
continued to run a very large and persistent surplus, raising the eurozone's
overall current account, which was close to balance in 2009-2011, to a surplus
of 2.3 percent of GDP in the first half of 2013. “Germany’s current account
surplus rose above 7 percent in the first half of 2013, while the current
account surplus for the Netherlands was almost 10 percent. Ireland, Italy,
Portugal and Spain are all now running current account surpluses as import
demand in those economies has declined. Thus, the burden of adjustment is being
disproportionately placed on peripheral European countries, exacerbating
extremely high unemployment, especially among youth in these countries, while
Europe’s overall adjustment is essentially premised on demand emanating from
outside of Europe rather than addressing the shortfalls in demand that exist
within Europe.”
The section on the Euroarea emphasises the point: “Expansion was supported
by domestic demand growth in Germany - though growth in Germany still continues
to rely on positive net exports, which continues to delay the euro area’s
external adjustment process – and on domestic demand in France.”
Nobody can argue with such propositions, which are based on a correct
interpretation of well established facts, and are not at all new. The adoption
by Germany of more expansionary policies has been advocated by many economists,
from Martin Wolf (FT) to Paul Krugman (Those Depressing Germans, NYT 3
November 2013), from Jean Pisani-Ferry (Bruegel) to Mario Seminerio (La Cura
Letale, Rome, 2012), to the IMF Managing Director Christine Lagarde as well
as several IMF documents. What is extraordinary is that the criticism should
come from the US government and from research circles before it is raised by
the European Commission.
EC practice suffers from a totally arbitrary and unwarranted asymmetry in
treating surpluses and deficit countries: a current account deficit of 4% of
GDP triggers off a disciplinary procedure for the offending country, while a 6%
surplus averaged over three years is necessary before the EC takes any notice
of that imbalance, and even then only perfunctorily. In 2012 Germany recorded a
7% record surplus but the three year average was just under 6% and nothing was
said.
This is a general problem that Maynard Keynes had tried to address at the
Bretton Woods Conference (1944). His Plan assigned to every country a “bancor”
maximum overdraft facility equal to its average trade over five years; a
penalty interest rate of 10% would
apply to deficit countries above that limit, as well as to surplus countries on
anything over and above any surplus exceeding the size of the permitted
overdraft by more than a half, forcing compensatory exchange rate adjustments
or capital flows, and subject to confiscation of residual excess reserves above
the permitted surplus at the end of the year. “Nothing so imaginative and so
ambitious had ever been discussed", commented Lionel Robbins. But the US was then
the world’s biggest creditor and the Plan by the US representative Harry
Webster White was preferred by the 42 countries attending the Conference. The
burden of balancing trade was placed on deficit countries and no limit was set
on surplus countries, thus necessarily impressing a deflationary bias on
the nature of trade adjustments. The replication of
this approach by the European Union is one
of the many EU original sins.
There is a well known tenet of Keynesian economics,
resulting from national income accounting and not at all dependent on the
validity of Keynesian fiscal policies, and therefore unchallenged: the excess
of exports X over imports M, plus the excess of government expenditure E over
taxation T, plus the excess of private investment I over savings S, must
necessarily add up to zero. Thus a country experiencing a trade deficit must
necessarily run a government deficit and/or a compensatory excess of investment
over savings, hard to accomplish in the face of an otherwise shrinking demand.
In other words, the German trade surplus makes it all that much harder for
its deficit trade partners to balance their public accounts.
On 2 November the Economist’s Charlemagne column Fawlty
Europe commented on “Germany’s obsession with competitiveness”… “For
Germany booming exports are the measure of economic virility.” It is true that
Germany is reaping the benefits of wage and price reductions (the internal
devaluation) undertaken before the crisis; in the middle of the crisis any
country adopting the same policy would pay the price of worsening that crisis.
Germany also benefits from earlier structural reforms politically hard to
replicate, and from the relatively price-inelastic demand for its high
technology exports. But surplus countries like Germany, the Netherland and
Austria are also benefiting from an artificially low exchange rate, with
respect to the increasingly stronger exchange rate that would prevail if those
countries were using their own currency instead of the euro. And, be that as
it may, by holding down wages and failing to promote investment and growth they
make trade adjustment in Italy, Spain, Ireland, Portugal and Greece – which has
occurred – deflationary. Debtor nations were forced, mostly under German
pressure, into austerity eliminating trade deficits at the cost of perversely
rising debt/GDP ratios (see our earlier
post on the subject), while German surpluses persisted and their failure to
adjust magnified the costs of austerity and contributed to keep the world
economy depressed.
Charlemagne notes that Germany has also benefited from straight
protectionism, having failed to liberalise its construction and services.
While these sectors are not a significant share of German exports, a recent
OECD study stresses that in general services have a much bigger impact on trade
and trade competitiveness if we look at their inputs actually embodied in
exports, i.e. adopting a Value Added approach to trade accounting. Charlemagne
also recommends too that Germany could
do more to invest in education and infrastructure, and make child care
available for working women.
Moreover German energy-intensive producers are benefiting from an implicit subsidy
on their electricity consumption, through exemption from the expensive
surcharge used to finance Energiewende, the accelerated
introduction of renewable energy scheduled to reach 35% by 2020 and 80% by
2050. Earlier this year European Energy Commissioner Günther Oettinger told a
group of industry leaders that the price concessions for energy-intensive
companies in Germany clearly amount to “inadmissible” subsidy levels. German
business are concerned that they might have to repay hundreds of millions of
euros to the German government.
Only on 13 November did Jose’ Manuel Barroso, the EU President, announce an
“in depth analysis on the high German trade surplus”, with a view to understand
whether Germany can make a larger contribution to the re-balancing of the
European economy”. There is the prospect of a continued trade surplus of 7% in
2013, and the upwards revision of the 2012 trade surplus brings already the three year average above 6% in 2010-2012. Indeed
“Following statistical revisions, the indicator has exceeded the threshold each
year since 2007” and “the surplus is expected to remain above the indicative
threshold over the forecast horizon, thus suggesting that it is not a short
lived cyclical phenomenon” (EC 2013). German savings exceed investment, and
despite boasting the second lowest share of private sector debt in GDP (firms
and households) and low interest rates, private sector de-leveraging has
continued, failing to boost demand; capital formation has declined last year.
This calls for some action, not least to reduce the pressure for euro revaluation. But the bottom line of the EC document
is simply that “Overall, the Commission finds it useful to conduct an
in-depth analysis with a view to assessing whether imbalances exist”
(italics in the original). This is a grotesque existential problem: what
additional evidence is needed to establish that an imbalance exists, other than
the imbalance itself?
German press and politicians have reacted to the US Treasury accusations
and to the EC initiative with a combination of denials, hubris and cries of
victimisation. The German Economics Ministry issued a strongly worded
statement, saying that Germany's surplus is "a sign of the competitiveness
of the German economy and global demand for quality products from
Germany." It dismissed the accusations as “incomprehensible” and
challenged the US to "analyze its own economic situation."
A memo to
finance minister Schäuble reads: "The German current account surplus offers no reason
for concern for Germany, the euro zone or the world economy"; Berlin is
pursuing a course of "growth-friendly consolidation," and there are
no imbalances "that would require a correction of our economic and fiscal
policy." See also “Complaints about German Exports Unfounded”, by
Jung-Reiermann-Schmitz,Spiegel.de 5
November, and “Raw
Nerve: Germany Seethes at US Economic Criticism” by Alessi, Spiegel.de 31
October.
It has been pointed out that the prospective new grand coalition between the CDU, its
Bavarian sister party, the Christian Social Union (CSU), and the Social
Democratic Party (SPD) has already agreed to increase government investment and
the minimum wage, both of which should stimulate domestic demand. But the
formation of that government – let alone its programme – is still under
negotiation.
The real issue is an EU governance
deficit. The worst thing that could happen to Germany as a result of an adverse
“in depth analysis” by the Commission is a reprimand by Marco Buti's
Directorate-General for Economic and Financial Affairs. No comment seems necessary.
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