The discussion about Germany’s high current account surplus and its causes has picked up momentum again in the last few weeks. International institutions such as the IMF, the OECD or the EU Commission criticize aloud the fact that a surplus equivalent to around eight per cent of GDP is far too high. But be careful: for political reasons they simply omit some important factors from the calculation.
As part of this international criticism, the call for higher pay increases has also become increasingly loud recently. This call is based on the assumption that Germany has obtained an “unfair” competitive advantage thanks to excessive wage restraint in previous years and this should now be reduced again by correspondingly stronger wage growth.
The wage argument plays a particularly important role in Anglo Saxon criticism of the German economic model. For example, the British business magazine The Economist recently drew attention to the fact that the share of consumer spending in aggregate economic output in Germany is particularly low. This is allegedly due to the fact that private household incomes have not kept up with the economy as a whole in the past few years as wages are not rising fast enough in Germany.
But this argument is too simple. In Germany, wages and salaries cannot be used to tweak economic policy as they are the result of negotiations between employers and employees. Trade unions and employers’ associations have their members’ interests in mind and the negotiations are beyond government control
The share of consumer spending in aggregate economic output in Germany is indeed somewhat lower than in other large industrialized countries. But in the past ten years these differences have been relatively small compared to France or Spain, for example, and are far from explaining the major differences in the development of the current account. Among the industrialized nations, the high ratios of personal consumption to gross domestic product (GDP) in Great Britain and the United States are more out of line.
The share of personal consumption expenditures in gross domestic product (GDP) has in fact declined notably in the last few years in Germany – as it has in other European countries. This has gone hand in hand with weaker growth of private households‘ disposable incomes relative to aggregate economic output. However, the reason for this is not weaker wage income growth as the share of wages and salaries in GDP has stabilized again since the crisis 2008/2009 and is higher today than the multi-year average.
The relative decline in disposable incomes is due far more to the weakness of income from self-employment and property income. Especially property income, which includes interest income, dividends and profit withdrawals as well as capital gains, is suffering from the repercussions of the low interest rate environment. The share of “interest and lease income” in disposable incomes has fallen by more than 50 per cent since 2008.
The argument that wages are too low assumes that Germany has created a permanent advantage as regards price competitiveness over its European neighbors thanks to the relatively small increases in collectively-negotiated wages. Comparing the development of unit labor costs in Germany to the average for the most important EMU countries since 1999, Germany is in fact in the “lead.”
Between 1999 and 2008 unit labor costs in Germany grew far more slowly than in the rest of the Monetary Union. However, during this period the unemployment rate in Germany was also higher than the EMU average. In 2005 underemployment in German was more than 11 per cent, 2 percentage points more than the EMU average and also higher than in Greece, Spain and Portugal. At that time Germany was “the sick man of Europe.”
The restrained pay policy pursued by German employers and employees may be deemed to have been an appropriate reaction to the disequilibrium in the employment market, a reaction that is necessary in a Monetary Union with fixed exchange rates. Then in 2007 the unemployment rate in Germany fell back below the EMU average, and since 2008 unit labor costs have been rising faster here than in other Eurozone countries. But this mechanism does not function everywhere: in France and Italy unit labor costs have reacted hardly at all in the last few years to the disproportionately high unemployment rate.
Finally, the weakness of the oil price has also made an important contribution to the recent increase in the current account surplus. In mid-2013 the oil price was still around USD 110 a barrel and Germany’s current account surplus was 6.4 per cent of GDP. Two years later the price for a barrel of Brent had fallen to USD 50 and the German current account surplus increased to +9.2 per cent of GDP. Cheaper oil is reducing the value of German imports and is increasing the current account surplus.
The nominal and real German foreign trade figures have diverged recently. Since 2013 German exports have increased more than imports in nominal terms, but in real terms this is the other way round. So adjusted for price effects Germany’s trade and current account surplus has not increased in the last three years, but has declined.
All in all, the theory that Germany’s current account surplus is mainly the result of exaggerated wage restraint is untenable. Admittedly, the fact that disposable incomes and consumer spending are growing more slowly than aggregate economic output undoubtedly plays a role, but the low interest rate environment, which is curbing the development of property income, is the main reason for this and not the slower pace of pay increases.
So the fundamental criticism that has recently been levelled increasingly at the German economic model not least by the Anglo Saxon media misses the mark. Wage restraint, especially in the years 1999 to 2007, was an appropriate reaction on the part of employers and employees to the high unemployment rate in Germany and – together with the Hartz-reforms – made an important contribution to the economic recovery and the strong rate of employment growth during the subsequent years.
If the economic boom in Germany continues and commodity prices sustain their slight uptrend, then Germany’s current account surpluses will also be reduced again. At any rate, hectic economic policy countermeasures would be misplaced.