3 thoughts on “Germany’s current account and global adjustment”

  1. I would appreciate if the author could identify just one country which makes its national fiscal policy based on what’s best for the global economy. It’s standard IMF advice to use the good times to pay down debt to create fiscal space for future crises. That is exactly what Germany did given it had historically high debt post unification. By the way, its debt is still above 60% which is according to the IMF the safety threshold for debt sustainability for Advanced Economies. This policy may have contributed to the CA surplus but its impact is much less important than that of the household and corporate sector saving. In particular, household consumption is much lower than US-UK. If you want symmetric adjustment, then U.K./US should force their consumers to spend less and Germany should force theirs to spend more. Until US/UK are willing to do that- which they don’t want to because it means they will have to tighten their belts as Germany had to in the mid-2000s- Germany is right to resist.


  2. There are no examples of countries currently (or historically?) conducting policy based on what’s best for the global economy rather than for themselves. That’s the point. The issue is more that German self-interest would be best served by a more expansionary fiscal policy.

    If you are concerned I am unduly harsh on Germany, this is not the case. Just wait and see.

    As to “standard IMF advice”—the 60% debt-to-GDP metric was plucked from thin air by the Europeans and endorsed by the IMF. It has little relevance today. Forget about it.

    Macroeconomics has a very slender understanding of “correct” public debt-to-GDP ratios. For example, though it is often claimed by economists and laypeople “government debt has to be repaid at some point” this is simply not true. Government debt need never be repaid. Economic theory has never suggested it should be.

    German government policies could easily impact private saving-investment balances. The “twin deficits” idea developed for a reason. It’s a conceit that government policy does not matter. If the Germany government expanded fiscal policy, the current account would certainly adjust.

    In addition, it is worth noting that Germany is accumulating—on the back of the sweat and toil of German workers—financial claims on the rest of the world the value of which might be considered dubious—unless the euro area project definitely succeeds. For example, Germany currently has a claim of €860 billion against the Eurosystem—about 25 percent of GDP. Should the euro fail, this claim will be open to negotiation; there is no reason to suppose this will be returned in full to the pockets of residents of Germany.

    In other words, the prudence story makes no sense unless debtors can repay. Sadly, it remains hit-and-miss still whether the euro area survives. It would be better for Germany to enjoy some more consumption as well as greater domestic investment instead of external assets on which non-residents could default. If I were a German saver and the euro failed, I would blame my government for their incompetence in losing my savings by peddling macroeconomic nonsense.

    Much of this is the fault of the euro as constructed, of course. But Germany is a large part of that construct.

    As to symmetric belt tightening: German spending is income for the rest of the world. To a first approximation, if Germany were to spend more, in real terms the rest of the world could perhaps hold consumption spending constant and still adjust given their income is increasing. This is not a zero-sum game. But detail matters.


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