The world appears to be in agreement on one thing. Germany’s current account surplus is too big. It is a cause of global imbalance and is therefore in urgent need of reduction. This is the view taken not only by the IMF and the USA. In Europe, the number of critical voices is also on the rise, with France’s front-runner presidential candidate Macron the latest to join this camp. He, too, considers the German surplus to be „untenable“.
First of all the facts: Germany’s current account surplus did indeed mark a record high last year of EUR 261bn. Since 2010 the surplus has been trending visibly upwards. Measured against gross domestic product, the German balance came to 8.3 percent in 2016 compared with 8.6 percent in 2015. In international terms, this is undoubtedly high – even if the readings of some countries like Switzerland or Holland are even higher. The expansionary monetary policy of the ECB and the drop in the oil price are important reasons for last year’s increase. These two factors, which German politics are unable to directly influence, are estimated to account for around three percentage points of the surplus alone.
IMF Managing Director Lagarde considers a surplus on current account of eight percent to be unwarranted. Pointing to Germany, she says: „Four percent might be warranted, but not eight percent“. In her opinion, half of the surplus should be lowered, preferably by means of additional investment expenditure. This would stimulate growth and by extension boost demand for foreign products, which in turn would lower the current account surplus. But how much would need to be additionally invested in order to reach Lagarde’s goal of halving the surplus?
An attempt to approximately answer this using a simple calculation quickly exposes how absolutely unrealistic this piece of advice is. The import ratio (i.e. the share of imports in gross domestic product, or GDP) lies at around 40 percent in Germany. This means that if imports are to grow as strongly as to be able to cut the trade surplus by half, GDP would have to grow by at least ten percent. Assuming for the additional investment expenditure that EUR 1 additional investment generates EUR 1.5 additional GDP (a multiple of 1.5) – which is more likely to be an optimistic assumption – investment stimulus to the tune of some seven percent of GDP, i.e. around EUR 200bn, would be needed.
Even if this „investment programme“ were to be spread out over five years, investment expenditure would still have to be raised each year by an additional EUR 40bn. State capital expenditure last year totalled nearly EUR 67bn (i.e. some 2 percent of GDP), with the federal government accounting for less than one third, i.e. EUR 20bn, of this. Yet even if Germany were to launch a national (i.e. federal government, Länder and municipalities) investment programme to reduce the current account surplus by half, the state investment volume would have to be quadrupled overall in order to reach the necessary size. Such a programme would be unrealistic in every respect, given the lack of investment projects or appropriate capacities in the building industry in Germany.
The relatively low level of private investment expenditure is also frequently mentioned in this context, the volume of which roughly corresponds to eight times the volume of government spending (2016: EUR 560bn or 18 percent of GDP). This means that an increase in the region of EUR 200bn would still be very ambitious but no longer quite as unrealistic as is the case with public expenditure.
However, the German state can only have a very indirect influence on the investment decisions of enterprises and private households. It cannot „order“ investments to be made, the decisions are made decentrally and on the basis of individual calculations. In the case of housing construction, sizeable growth rates have indeed been recorded in past years compared with the development of companies‘ machinery and equipment investment which has indeed been quite subdued for some years now, given the robust economic development.
But this cannot be construed as proof of irrational investment behaviour on the part of German enterprises. On the one hand, companies are evidently responding to the increased international uncertainty by exercising restraint and postponing investment projects; on the other hand, a high level of investment activity can also be noted abroad. Investing in Germany evidently no longer appears as attractive any more in many cases. State investments could well prove helpful in this context. The federal government, Länder and municipalities can make Germany more attractive as an investment location and thereby give the private economy incentive to invest.
But Germany does not need an economic stimulus package. From a macroeconomic perspective, allowance must be made for the fact that the German economy as a whole is not in a phase of underutilisation which might justify the need for a stimulus package. On the labour market in particular, there is very little latitude left: Employment is at a high level and unemployment has been in decline for years. It has now fallen to the lowest level since 1991 and the unemployment rate is the lowest in the whole of Europe. At least in some areas of the Federal Republic of Germany there is already a shortage of skilled labour.
A huge investment programme would therefore create new imbalances, not only in Germany but also in the whole of Europe. The economic divergence within the monetary union already visible today would intensify even further. This would make it even more difficult for the European Central Bank to formulate a single monetary policy for a currency area that is economically drifting apart.
So what remains to be done? There are indeed a number of areas in which economic policy can be used to bring about a reduction in the German current account. But we would need to bid farewell to the notion of short-term „global management“ that has evidently become increasingly popular in recent years.
To create more incentive to invest in Germany, the investment conditions need to be improved in particular. This also includes state infrastructure, with the federal government having already adopted a number of key initiatives such as the Plan for Federal Traffic Routes. Consideration could also be given to an efficiency-boosting corporate tax reform of the kind being repeatedly demanded by the German Council of Economic Experts, for example. By offering tax relief to private households, possibly in the form of a reduction in value added tax, consumption could be stimulated. A breakdown of the regulatory red tape, above all in the service sector, would also be an important step towards improving the growth conditions in Germany.
However, these measures will not contribute in the short -term but over a period of 5-10 years towards reducing the current account surplus. By that time, the demographic transformation in Germany will probably also no longer be having a positive but a gradually negative impact on the current account balance. This is because the declining number of (younger) persons in gainful employment and the growing share of pensioners will bring about a reduction in savings in favour of consumption. Provisions should therefore also be made for this today in the form of a forward-looking and long-term oriented economic policy.