In Germany, the external accounts surplus has reached record levels: 8,1% of GDP on average over the last three years. It is much higher than the (already generous) ceiling set by the European Commission (6,0%). Excessive German surpluses threaten the sustainability of European growth and even of the European Union itself; moreover they come at the expense of the German families themselves. Experience in the recent past proves this.
Such high surpluses have, in fact, penalized consumers and savers in Germany, through at least two channels: i) German competitiveness gains, obtained thanks to strong increases in productivity which are not matched by similar wage increases, have disadvantaged household consumption (already contained); this has also discouraged investment and kept domestic demand weak relative to production, causing an excess of savings which is the flip side of the surplus in the external accounts; ii) excess savings inevitably move abroad (it is a purely accounting matter) and create an accumulation of credits towards deficit countries, which in the long run become unsustainable and generate crises, which lead to the devaluation of the wealth accumulated on the abroad; a bad deal for German savers.
The latest of these crises was that of sovereign debt in the euro area. The return from it took place via deflation and the fall in domestic demand in the peripheral countries. And the German trade surplus vis-à-vis other Eurozone countries has decreased through lower exports and imports; the reduction in German imports contributed to the weakness of domestic demand throughout the euro area, accentuating the negative spiral for investments and GDP. All this leads to disintegrating thrusts of the European Union whose origin is precisely also the excessive surplus in the German external accounts. Peripheral countries must continue along the path of structural reforms to gain competitiveness and foster growth. But the path would still be too long and at the risk of new stumbling blocks in the absence of a decisive German policy to strengthen wages and consumption, with a strong stimulus to domestic demand and higher inflation, including with expansionary budgetary measures. To the benefit of the German families themselves.
The action of the ECB, also thanks to unconventional instruments, supported the value of German credit abroad. The more robust recovery phase in the Eurozone brings the start of the normalization of monetary policy closer, also because it reassures the markets about the sustainability of the external debts of the peripheral countries. It is a delicate phase and requires a renewed joint and symmetrical effort to rebalance the economic fundamentals of European countries in a sustainable way.
Excessive surpluses to the detriment of German families themselves:…
Germany's current account balance has been positive since 2002 and rose rapidly to +6,7% of GDP in 2007. After a modest correction at the onset of the crisis, it reached a high of 8,5% in 2015; in the first half of 2017 it was equal to +7,6% of GDP, according to seasonally adjusted data from the Bundesbank. These levels are considered excessive according to the same parameters of the European Commission, more tolerant on the side of assets than that of liabilities: the so-called Six-pack, in fact, establishes that a surplus must not exceed 6% of GDP on average over the last three years, while the limit for the deficit is set at 4%.
The German surplus will remain well above the 6% threshold for a very long time: according to IMF forecasts, in 2022 the three-year average will still be equal to 7,5% of GDP. Conversely, the balances of European countries that had recorded an excessive external deficit (such as Portugal, Ireland, Greece and Spain) or close to the limit (such as Italy) all recovered quickly, via reduction in domestic demand and deflation competitive. The asymmetrical correction of external account imbalances aggravated and prolonged the European recession, as observed on several occasions by the CSC1. At the same time, Germany's excessive and persistent surpluses, which are unsustainable in the long run, have hurt German consumers and savers themselves.
The current surpluses constituted, in fact, a transfer of resources abroad, with the renunciation of greater consumption and private and public investments, especially in infrastructures; this has resulted in lower growth of the German GDP, estimated in the order of one point lost per year in the last twenty years. Furthermore, the wealth accumulated by Germans in foreign assets suffered large losses in valuation (before being supported by ECB policies). Finally, the high unemployment in the peripheral European countries (also due to imbalances in external accounts) has pushed the immigration flows from non-EU countries towards the German labor market (at full employment), generating strong social tensions, which were fully manifested in the last political elections, with the formidable rise
of populist and nationalistic parties.
Defenders of Germany's position usually cite three arguments: first, the surplus is determined by the competitiveness of German goods; second, Germany's trade surplus vis-à-vis other European countries has decreased; third, German savings financed the debts of peripheral countries and it is therefore the latter who have to bear the cost of rebalancing, as in the story of the ant and the grasshopper. However, they are partial theses, which ignore some fundamental macroeconomic principles.
… too much saving has slowed down growth, …
Firstly, it is true that the trade balance constitutes the most significant item of the current account and, therefore, its variations guide, in many cases, the dynamics of the overall balance. In the case of Germany, in particular, trade and current surpluses have gone hand in hand and are similar in level since 2009; while in the early XNUMXs the improvement in external accounts was also favored by the rise in the balances of services and primary income. What matters, however, is net exports, i.e. the difference between exports and
imports. German competitiveness gains, above all through wage moderation policies, favored the former and, at the same time, held back the latter, because they penalized household consumption, which was already structurally low.
During the crisis, the weakness of domestic demand, in the absence of a significant stimulus to the public budget, slowed down the dynamics of GDP, also in Germany: lower demand means lower production and investments, which in turn reduce demand, and so on . It is Keynes' paradox of thrift: a higher propensity to save can lead to lower GDP and lower savings. Indeed, in the national accounts, net exports are, by definition, equal to the excess of savings on investments. From an accounting point of view, the increase in German net exports, as a percentage of GDP, was associated with an increase in savings and substantial stability in investments; the greater saving was due, in particular, to a drop in household final consumption of around four points of GDP compared to the average of the pre-crisis 51,5s (to 2016% in 19,6), while public consumption increased only by one point (to XNUMX%).
In other words, the Germans have tightened their belts. Part of this excess saving depends on structural factors in the German economy. The most relevant is the expected aging of the population, which, in combination with an already high average age, produces a strong motivation to save to finance consumption in old age. However, these factors, taken together, can only partially explain the current level of the German current surplus. Indeed, according to IMF estimates, in 2016 the current balance consistent with medium-long term economic fundamentals was 4,5 points of GDP lower than that actually achieved; in the world, only Singapore and Thailand, as well as Germany, have surpluses that are "substantially stronger", ie more than 4 points of GDP higher than that estimated on the basis of fundamentals.
… lower intra-euro area trade has reduced European demand…
Secondly, the German trade surplus has actually decreased vis-à-vis the other euro area countries, while it has widened vis-à-vis extra-area countries. However, the reduction of the intra-area German surplus was partial and was interrupted in recent years: from the maximum of 4,7% of GDP in 2007 it fell to 1,8% in 2013, but then recovered to 2,5% % in 2016. Furthermore, the most relevant aspect is that the dynamics of the intra-area balance from 2011 onwards result from a decline in both trade flows, as a percentage of GDP: more
pronounced for exports and for imports in 2012-2013 (with a decrease in the surplus) and vice versa in 2015-2016. As regards the extra-area dynamics, however, a substantial stability of exports was associated with a drop in imports.
In other words, the reduction in German imports therefore contributed to the general weakness of European demand, accentuating the negative spiral for investments and GDP. In exchanges with foreign countries, another transmission channel was at work, via international value chains: the lower production of downstream companies, typically German, due to their lower exports to the rest of the euro area, translated into lower demand for semi-finished products for upstream companies. A significant channel, given the high international fragmentation of production within the Europa factory. From a European perspective, trade flows between EU member countries constitute internal demand (both for final goods and intermediate products), on which the single market, with its size and the presence of sophisticated and high-powered buyers of purchase, is naturally focused. The German model of a small open economy is therefore not applicable on a continental scale.
… and German foreign claims have lost value
Finally, German surpluses financed, by accounting definition, the deficits of other countries, especially those of the European periphery before the crisis. German savers thus hold, both directly and indirectly, net claims vis-à-vis these countries (but also, for example, the USA). According to German pro-position commentators, this linkage is kept on artificial life by the ECB's hyper-expansionary policies, which are technically reflected in TARGET2 balances between national central banks, with zero interest paid on debts; so that the weight of the excesses of the cicadas of the European periphery falls unjustly on the German ant. The metaphor, however, is misleading, as already clear in the previous analysis.
Beyond the moral judgment, credit and debt are evidently two sides of the same coin; consequently, if the other economies go into crisis, the Germans suffer also through the devaluation of the wealth accumulated in assets of those economies.
The accumulation of a positive net position of surplus versus deficit countries cannot go on indefinitely. Under flexible exchange rates, currency movements act as automatic stabilisers, with a relative appreciation of the country's currency in surplus, when the voluntary financing of deficits ceases. Otherwise, in the absence of corrections by economic policies, the markets begin to doubt the ability of deficit countries to repay the debt and securities issued in their currency lose value. In both cases, the country's net surplus assets tend to experience negative valuation adjustments and thus foreign investment turns out to be a bad deal for savers (as observed in the vast majority of historical episodes).
In extreme cases there is a financial and/or currency crisis in the debtor country, with a collapse in the value of the surplus country's net foreign assets. This is what happened in the European sovereign debt crisis in 2010-2011 and, before that, in the financial crisis generated by American subprime mortgages (2007-2008). In those years, Germany's net external position underwent major downward corrections. In more recent years the value of German assets has been buoyed by ECB intervention. After 2011, also thanks to the unconventional monetary policies of the ECB, Germany's net external position increased faster than the accumulation of its current surpluses, thanks to the recovery in the value of peripheral countries' assets. At the end of 2016 it was equal to 54,9% of GDP. However, it still bears the sign of the crisis, being as much as 17,0 points of GDP lower than the level obtained by cumulating all the current account surpluses recorded after 2002 (figure C). In other words, there has been a destruction of part of the German savings glut, so that German citizens have not only given up on consumption and accepted wages lower than productivity gains, but have then seen it partially (and inevitably) nullify these efforts.
A symmetrical effort is needed for the benefit of all
The more robust recovery phase in the Eurozone brings the start of the normalization of monetary policy closer, also because it reassures the markets about the sustainability of the external debts of the peripheral countries. It is a delicate phase and requires a renewed joint and symmetrical effort to rebalance the economic fundamentals of European countries in a sustainable way. In fact, as Tommaso Padoa-Schioppa observed, the principle of the house in order is not always true, written in European rules above all at the behest of Germany, according to which putting one's house in order is a sufficient condition for the community to function; instead, it is necessary to think of the common goods and the externalities that are generated.
Peripheral countries must continue to do their homework, continuing along the path of structural reforms to gain competitiveness and foster growth. But the path would still be too long and at the risk of new stumbling blocks in the absence of a decisive German policy to strengthen wages and consumption, with a strong stimulus to demand and higher inflation, also with expansionary budgetary measures. This would allow for an adjustment along several directions: higher German and peripheral imports and exports, therefore higher European domestic demand, and a realignment of price competitiveness without deflationary pressures. To the benefit of German households themselves, in terms of higher income growth, higher living standards and higher value of their savings.
