17 March 2014

Bundesbank/Weidmann: External imbalances in the euro area - Germany's role

Weidmann said that Germany's role as a capital exporter was unlikely to change, meaning that, to a certain extent, German surpluses were 'here to stay'. Meanwhile, the Federal Ministry of Finance published details of the government draft of the 2014 federal budget.

Weidmann looked at the external imbalances in the euro area and Germany’s role in this context. In particular, he focused on three points:

• compared to a fixed exchange rate regime, the adjustment pressure of a deficit country in a currency area is cushioned by the single monetary policy, avoiding excessive adjustment costs, but which also calls for additional rules;
• stimulating German demand cannot be a substitute for removing rigidities in the deficit countries, but that strengthening Germany’s growth potential, for instance by increasing competition in the services sector, will be helpful with regard to the current account as well;
• due to its demographics and degree of economic development, Germany’s role as a capital exporter is unlikely to change, which means that, to a certain extent, German surpluses are here to stay.

What is also important, he argued, is that the banking systems in some euro area countries haven’t correctly fulfilled their economic function. And the national banking supervisory authorities have intervened too little, and too late. Providing for a more stable financial system and contributing to a more efficient allocation of capital are the ultimate goals of the Banking Union.

Germany's role

There have been repeated calls for German competitiveness to be lowered to reduce the imbalances in the euro area. One possible solution that has been suggested is a considerable hike in German wages – in other words, a larger increase than is warranted by conditions on the domestic labour market. The idea behind this is that competitiveness is relative: one country’s loss is another country’s gain. In terms of the euro area, however, this would only work if the euro area were an island in the world economy and not competing with the outside world. Correspondingly, estimates we have carried out show that the results of such a policy would disappoint.

Fundamentally, Germany’s surplus is not due to distortions, but the result of market processes. As the European Commission pointed out in its recently published In-Depth Review, the surplus is the result of an interplay of various factors and developments in Germany as well as globally and among its euro area partners which affected savings and investment in the domestic economy.

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While there is room for improvement in Germany especially when it comes to the efficiency of its services sector, the fact is that European mark-ups are high in general, compared to the US, for example. It is therefore high time to fully harness the forces of the market for Europe, by making the most of its main catalyst for competition and growth, the European single market... 

Reforms that strengthen competition in the services sector therefore hold the promise of delivering stronger and more balanced growth. And more balanced growth is likely to translate into a moderation of the current account as well. Still, given its demographics and degree of development, Germany’s role as a capital exporter is unlikely to be completely reversed. This means that, to a certain extent, German surpluses are here to stay – a point that the Commission also emphasised in its recent report.

To prevent future financial crises, an effective restructuring and resolution regime is of the essence. A functioning resolution regime with a credible bail-in of shareholders and creditors strengthens incentives for effective credit monitoring and moderates banks’ risk appetites. In so doing, it reduces the risk that, in the event of future bank failures, taxpayers are again the first line of defence. This will enhance the allocation of capital and reduce the risk of a bubble emerging.

Stimulating German demand by means of an excessive wage increase or a credit-financed increase in public spending cannot be a substitute for that. And given its demographics and degree of economic development, Germany’s current account is likely to have a positive sign in the future as well. But by removing rigidities in the services sector, Germany might not only strengthen its growth potential, but could do so in a way that is likely to have a moderating impact on the current account as well.

Reforms like these show that adjusting imbalances in the euro area does not need to be a zero-sum game. If done properly, it will serve the interests of everyone, and this is why, despite the struggle and setbacks, it is a path worth pursuing.

Full speech

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The German cabinet adopted the second government draft of the 2014 federal budget, the key figures for the 2015 federal budget and the financial plan up to 2018. It also adopted the 2014 Budget Support Act. As of 2014, the federal budget will be structurally balanced. From 2015, the budget will require no new borrowing at all.

Commenting on the decisions, Finance Minister Wolfgang Schäuble said: “The decisions that the government took today on the federal budget mark the beginning of a new era. From 2015 onwards, the Federation will incur no new borrowing. We will not spend more than we take in. At the same time, we are focusing on investing in the future. We want to shape Germany’s future – without recourse to new borrowing. Balanced budgets are a provision for the future. Stability-oriented fiscal policies are policies for growth. They will guarantee growth opportunities and social equality, now and in the years to come.”

The Federation’s spending in 2014 will total €298.5 billion, with net borrowing amounting to €6.5 billion. In structural terms – in other words, adjusted for cyclical factors and purely financial transactions – the 2014 federal budget is completely balanced. Annual spending will rise to €327.2 billion by 2018, the end of the current financial planning period. The financial plan up to 2018 envisages a balanced budget without any new borrowing each year between 2015 and 2018.

The priority measures contained in the coalition agreement, which together total €23 billion, are soundly financed and are contained in the financial plan. The federal government is also increasing expenditure on investments. There will be significantly higher expenditure in the areas of education and research, which are allocated an extra €6 billion and €3 billion respectively in the period up to 2017.

Full press release © Federal Ministry of Finance

© Deutsche Bundesbank