Loosen the purse strings to boost growth, critics suggest

Germany has come to be seen as the miser among major economic powers, saving too much of its enviable income and spending too little. Germans, naturally, do not see it that way.

The case against Germany goes like this: the world economy is short of demand, relative to its capacity to supply. The evidence is to be seen in high unemployment and really low inflation wherever you turn.

Against the background of a global demand drought, Germany's large and persistent current account surpluses, around 7 per cent of gross domestic product, are conspicuous.

The world's fourth-largest economy is not pulling its weight, demand-wise.


The surpluses have been criticised by the European Commission, the International Monetary Fund and the United States Treasury and seen as evidence the German economy is out of kilter, over-reliant on exports and deficient in domestic demand.

Germany benefits from the fact that the euro gives it an exchange rate almost certainly weaker than the Deutschmark would have been. The IMF estimates the undervaluation at between 5 and 15 per cent.

It would be foolish, however, to attribute the competitiveness of German exports to that alone.

The quality of German engineering is well known. And during the 2000s the country went through a joyless period of internal devaluation, including a decade of stagnant real wages, to rebuild its competitiveness.

But no one is suggesting Germany should export less, only that it should import more.

Near-term economic growth forecasts have been revised down to little more than 1 per cent a year.

So running a balanced Budget as Chancellor Angela Merkel's Government is determined to do looks like too tight a fiscal policy.

Its large and persistent external surpluses testify to a chronic imbalance between savings and investment within Germany, either too much of the former or too little of the latter.

It could usefully spend more on infrastructure and education, the European Commission says.

Germans themselves may well agree, but question how much use increased spending in those areas would be to their trading partners.

There is in any case a legal barrier to a significantly expansionary fiscal policy, the so-called "debt brake" limiting fiscal deficits to a third of 1 per cent of GDP, which was written into Germany's constitution after the euro crisis.

Keynesian arguments about how unhelpful weak domestic demand in Germany is to its trading partners cut no ice with Ingrid Arndt-Brauer, who chairs the federal Parliament's finance committee. "We can't make policy for the whole world," she says, "and Germany believes that having a balanced Budget is setting a good example."

The European Commission says the private sector is predominantly responsible for the expansion of Germany's current account surplus - both an increase in households' net savings and firms turning from being net borrowers to net lenders.

Policy changes flowing from the large adjustment costs of reunification and European monetary union, coming on top of a rapidly ageing population structure, have encouraged households to save more.

The fiscal implications of that ageing population combined with a legacy of public debt (around 74 per cent of GDP, or nearly three times New Zealand levels) helps to explain the German Government's steely commitment to a balanced Budget.

Higher household savings need not result in a rising current account surplus, the commission says, if used to finance higher investment.

But this has not happened in Germany, where weak income growth, adverse demographics and the lingering effects of a property bubble in the 1990s have kept residential investment subdued.

Meanwhile, business investment has been weak in recent years despite healthy corporate balance sheets and very low interest rates.

That Germany's trend growth rate is low and falling, even as the country clocks up high external surpluses year after year, shows that relying on external demand as the main driver of growth will not deliver jobs and rising living standards in an era of an ageing population and fierce global competition, Brussels warns.

It recommends stepping up public investment, especially in infrastructure, and reducing a relatively high tax burden on labour, low wage earners in particular.

Measures like that, aimed at boosting domestic demand, would not only raise Germany's growth rate, the commission argues, but have positive spillover effects on the rest of the euro area.

When the eurozone looks to be straying perilously close to the quicksand of deflation, complacency in Berlin could be a costly mistake.

Among the evil effects of deflation is to increase the real burden of debt, and for the weaker members of the euro area that could be the final straw.

In addition to the direct trade channel, Germany has a huge financial exposure to the rest of the euro area arising from measures to bolster liquidity in the European banking system during the euro crisis. The IMF says Germany's net "target 2" claims on the Eurosystem were more than 500 billion at the end of last year, albeit down from 750 billion in 2012.

"The current account surplus won't be of much use to them if the others default," says Oliver Hartwich, the German economist who heads the New Zealand Initiative. The euro crisis, he says, is not over.

Brian Fallow visited Germany as a guest of the German Government.