Both extremes bluntly simplify a complex reality in a way that kills any serious policy debate. Let’s look at the facts and consider what can be done in their light. For several years, Germany has run a sizeable current account surplus. Recent data indicate that the surplus has surpassed 6 per cent of GDP in every year since 2007.
What is behind the large surplus? A key factor has been the deepening of European integration in the past ten years, since this has helped strengthen Germany’s industrial competitiveness in many ways. First, the creation of the euro prevented the German exchange rate from appreciating to reflect the large surplus. Second, the integration of the production chains with central and eastern Europe allowed Germany to diversify and profit from a large pool of well-educated and cheaper labour. And third, financial market integration and interest rate convergence drove international capital flows which mirrored these current account developments.
Equally important, adjustment channels are influenced significantly by global economic interdependence. Essentially, the eurozone is neither a small open economy nor a large closed one, but a large open economy that trades a lot with the rest of the world. Germany is specialised in products that are in demand in the rest of the world and is highly competitive on both quality and price. High savings and low investment in many sectors have contributed to the large and persistent current account surplus.
The prospect of Germany’s ageing population translates today into lower consumption and higher savings for retirement. Investment should go up now because an ageing population should see the economy becoming more capital-intensive. When ageing kicks in, savings should start going down and consumption up.
In the economic analysis that the European Commission provides for the reinforced policy coordination, we have looked at the best ways of creating a win-win outcome for both Germany and the eurozone as a whole. Removing the bottlenecks to domestic demand would contribute to a reduction in Germany’s external trade surplus. The EU Council’s recommendations to Germany, adopted in July, urge the country to open up the bottlenecks to the growth of domestic demand. In particular, Germany should create the conditions for sustained wage growth, for instance by reducing high taxes and social security contributions, especially for low-wage earners. The country should further stimulate competition in services in order to boost domestic sources of growth.
All this would enhance Germany’s economic performance and welfare and could help reduce the inequalities that have accumulated in recent years. But it would also have a significant positive impact on the eurozone economy. For while a rise in demand in Germany might not lead directly or immediately to a large rise in exports from southern Europe, the reforms the EU is advocating for Germany would facilitate a genuine and mutually beneficial rebalancing in the eurozone economy.
Of course, Germany is not the only country whose policies have spillover effects on the rest of the eurozone. As the two largest eurozone economies, Germany and France together hold the key to a return to growth and employment in Europe. If Germany can take steps to lift domestic demand and investment, while France embraces reforms to its labour market, business environment and pension system to support competitiveness, they will together do a great service to the entire eurozone – providing stronger growth, creating more jobs and reducing social tensions.
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See also FT-blog: Rehn siding with Washington in its battle with Berlin?
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