by Kenneth Rogoff
| CAMBRIDGE – When the US Treasury recently added its voice to the chorus of critics of Germany’s chronic current-account surplus, it underscored the deep disagreement over what, if anything, should be done about it. The critics want Germany to increase its contribution to global demand by importing more and exporting less. The Germans view the maintenance of strong balance sheets as essential to their country’s stabilizing role in Europe. Both sides’ arguments will certainly receive a full airing at the spring meetings of the International Monetary Fund and the World Bank. Unfortunately, the debate has too often been informed more by ideology than facts. The difference between what a country exports and imports can reflect myriad factors, including business cycles, demographics, investment opportunities, and economic diversification. It can also reflect the government’s penchant for running fiscal surpluses; after all, the current-account surplus, by definition, is the excess of public and private savings over investment. During the first half of the 2000’s, US policymakers chose not to worry about sustained current-account deficits, which peaked at above 6% of GDP. They argued at first that the deficits merely reflected the world’s attraction to superior US investment opportunities, an odd position given that the US was not growing especially quickly compared to emerging markets. Later, academic researchers identified more plausible reasons why the US might be able to run large deficits without great risk, as long as investors’ desire for diversification, safety, and liquidity sustained global demand for US assets. But policymakers should have recognized that even these better rationales had limits, and that massive sustained current-account deficits are often a blinking red signal of deeper problems – in this case, over-borrowing by households to finance home purchases. In the case of Germany, of course, we are talking about surpluses, not deficits. And even though the surpluses exceed 6% of German national income and would seem to be on the same order of magnitude as pre-crisis US deficits, one must remember that the German economy is less than a quarter the size of the US (at market exchange rates). However, as the Center for European Policy Studies’ Daniel Gros has pointed out, the issue is not simply Germany. Smaller northern European countries, including the Netherlands, Switzerland, Sweden, and Norway have been collectively running surpluses at least as large as Germany’s relative to national income, and, in absolute terms, their combined surpluses are even larger. So the issue obviously merits attention. But what is the cause, and is it related to policy? Certainly, no one can criticize northern Europe for exchange-rate undervaluation. By almost any purchasing-power measure, the euro seems overvalued (and the Swiss franc even more so). Keynesians look at these surpluses and say that the northern European countries should drive them down by running much larger fiscal deficits to boost domestic demand. They have a point, but they grossly overstate the case. Many studies have shown that changes in private savings and investment tend to offset partly the current-account effects of higher fiscal deficits. For example, larger German fiscal deficits would hardly have been a decisive factor in Europe. Research by the IMF and others suggests that the demand spillovers from German fiscal policy to Europe are likely to be modest, particularly in the eurozone’s troubled countries, like Greece and Portugal. Germany trades with the entire world. The European Commission has recently completed its own report on Germany’s surpluses, concluding that it is difficult to pin down the many factors underlying it, which of course is true. For example, Germany’s capital-goods exporters have benefited enormously from growth in China. The Commission nonetheless argues persuasively that policies to promote public and private investment would tame the surpluses in the short term and strengthen German growth in the long term. One might add that there are still extensive impediments to competition in the service and retail sectors in many northern European countries. Removing them would increase consumption of all goods, including imports. And Germany is right to point out that its strong balance sheet underpins Europe’s fragile stability today. Would European Central Bank President Mario Draghi’s vow in the summer of 2012 to do “whatever it takes” to save the euro have been nearly as effective if investors doubted Germany’s underlying financial strength and resolve? At the same time, it is also true that Germany could have been more forthcoming and more liberal in using its balance sheet to defuse debt-overhang problems in periphery countries like Portugal and Greece, and perhaps even Ireland and Spain. The bottom line is that large sustained external imbalances are something that global policymakers do need to monitor closely, because, as the US housing bust showed, they can be an indicator of problems that need to be investigated more deeply. And critics of the surplus countries are right that there are two sides to every balance, and that policies in both surplus and deficit countries should be subject to review. But it is wrong to believe that simplistic answers, such as more fiscal stimulus or more austerity, are a panacea; more often, the underlying problems relate to debt, structural rigidities, low investment, and weak competitiveness. |
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