At the beginning of each year Germany’s current account surplus regularly comes up for discussion. In the opinion of many international observers it is simply too big. Not only the IMF and the USA are of this opinion. The EU Commission is not stingy with its criticism, either.
Last year Germany’s surplus was probably around 7.5 per cent of gross domestic product, so compared to the previous years at least it has fallen slightly. In 2015 the current account balance peaked at 8.5 per cent of German economic product, it then declined in 2016 to 8.2 per cent. The EU has defined a surplus of more than 6 per cent of gross domestic product (GDP) as a critical threshold. At this point it believes there is a risk of a “macroeconomic imbalance” that could be dangerous.
In past years, the ECB’s expansionary monetary policy and the fall in the price of oil have been important drivers for the large surplus. These two factors, on which German politics has no direct influence, alone probably account for around three percentage points of the surplus, whereby the oil price rose again somewhat last year and has, therefore, lost some of its importance.
German politicians are often called upon to steer actively against the surplus, for example by spending more. This would allegedly stimulate growth and thus demand for foreign products, which would supposedly in turn reduce the current account surplus. But the influence of government spending on German imports is far too small for an investment programme to have sufficient effect. If Germany were to launch a state investment programme large enough to cut the current account surplus in half, we calculate that the total volume of state investment would have to be increased around fourfold in order to achieve the required size. Such a programme is unrealistic in all respects. There are not enough investment projects here in Germany and the construction industry does not have sufficient capacity.
What’s more, Germany does not need an economic stimulus package. From the macroeconomic point of view it should be borne in mind that the German economy as a whole is not going through a phase of idle capacity in which an economic stimulus package would perhaps be justified. In particular, there is little leeway left in the employment market: The level of employment is high and unemployment has been falling for several years. It has now reached the lowest level since 1991, the unemployment rate is the lowest in the whole of Europe. In some parts of Germany at least there is already a lack of skilled workers.
So what can be done? There are indeed levers with which economic policy can work towards reducing the German current account surplus. But one needs to say farewell to the notion of a short-term “global steering of the economy” such as seems to have become increasingly popular again in the past few years.
It is above all the investment conditions that need to be improved in order to stimulate more investment in Germany. These also include the public infrastructure, whereby an important initiative has already been taken here by the German federal government with, among other things, the German Federal Transport Network Plan (Bundesverkehrswegeplan). In addition, thought needs to be given to an efficiency-enhancing corporate tax reform, as called for repeatedly by the German Council of Economic Experts (Sachverständigenrat), for example. Tax relief for private households, for example by abolishing the solidarity surcharge, could stimulate consumption. Lowering regulatory barriers, above all in the service sector, would also be an important step towards better growth conditions in Germany.
But such measures would not make themselves felt in the short term but rather over the next 5 to 10 years. By then demographic change in Germany would no longer have a positive impact on the current account but gradually a negative one: the declining number of (younger) people in work and the rising proportion of pensioners will lead to savings being reduced in favour of consumer spending. Prudential measures also need to be taken today for this situation, including a forward-looking economic policy oriented to the long run.