Friday 13 December 2019

Germans needs to spend - for their sake and Europe

German chancellor Angela Merkel may leave office before the next general election in 2017. Photo: Reuters
German chancellor Angela Merkel may leave office before the next general election in 2017. Photo: Reuters
Dan O'Brien

Dan O'Brien

Germany has come in for a lot of blame in recent years. Although this column is no fan of Angela Merkel, a good number of the charges made against her and her government are either unfair or substantially wrong.

But there are criticisms of Germany which are warranted. The latest came last weekend. At a meeting of finance ministers from the world's biggest economies, known as the G20, the US treasury secretary, Jack Lew, again urged Germany to do more to stimulate growth in Europe. The German finance minister, Wolfgang Schauble, was dismissive, despite a growing number of indicators pointing to risks of yet another recession in the Eurozone.

Underpinning Lew's warranted, if diplomatically-made criticism, is the one aspect of the Eurozone blame game where Germany is fully guilty as charged: its huge balance of payments gap.

This measure shows the gap between what Germany earns from the rest of the world compared to what it pays out for foreign goods and services is around €200bn annually.

As a percentage of GDP, that is over 7pc, one of the largest imbalances in the world, and by far the largest of any big economy, as the accompanying chart of G7 imbalances shows (for further comparison, China, another economy known for its exporting prowess, is running an external surplus of around 2pc of GDP).

While reasonable people can take different positions on many issues around addressing the problems of the Eurozone, it is almost impossible to disagree that Germany needs to reduce its external imbalance and that doing so would be good for everyone in the currency union - both Germans and non-Germans.

The current account of the balance of payments has two sides - money earned from the rest of the world and money paid out to the rest of the world.

Nobody argues that German should earn less from its exports. The success of the German export sector is good for all of Europe. Reducing the country's huge imbalance should, therefore, not come from deliberately engineering lower exports. Rather, it should come from introducing policies that allow Germans to buy more from the rest of the world, including their struggling neighbours in the Eurozone.

Given that imbalances in the Eurozone are destabilising and must be addressed, and given the win-win nature of boosting German imports, it is a wonder that the rest of the Eurozone has not ganged together to pressure Germany to do its share.

What should the rest of Europe be asking of Germany?

In seven of the past 10 years, public investment in Europe's largest economy has not even kept pace with the rate of depreciation. Jammed motorways and crumbling bridges are increasingly causing bottlenecks and reducing the capacity of the economy to grow.

Even in normal times, the return on investment in basic infrastructure capacity means it makes sense to borrow to fund the investment. But these are not normal times. The German government can currently borrow for next to nothing. Given the need for investment, the return on it (particularly with such low borrowing costs) and the fact that Germany has more fiscal headroom than most countries, a big investment programme makes sense for Germany and the rest of Europe because, among other things, it would boost weak domestic demand and suck in imports in the process.

A second policy objective should be boosting wages.

Just as a large and persistent current account deficit is a sign that an economy is uncompetitive, a large and persistent surplus is a sign of over-competitiveness.

The great success of the German economy in recent years has been employment growth and the decline in joblessness that has come with it.

In the years up to 2006 employment had been flat-lining, with around 39 million Germans at work. Jobs growth then took off. Over the next two years it surged. Even the shock of the Great Recession of 2008-09 could not derail the employment boom. After a period of stagnation in jobs growth, it took off again in early 2010. There are now more than 42 million Germans at work - a net increase of 3 million in less than a decade and at a time when the population is barely increasing.

The result is that the unemployment rate has fallen almost continuously. During the summer it fell below 5pc for the first time since the early 1980s. The ratchet effect, whereby the underlying German jobless rate rose after each recession in recent decades, appears to have been definitively broken.

But German workers have not got their fair share of the spoils. Despite wage growth perking up a little in recent years, it goes nowhere near the level warranted, particularly in the traded sector.

Although wages are mostly set by the market, government can influence pay. If the German government signalled that, in the absence of fairer pay levels, it would raise corporation tax in order to fund an income tax cut, it could ensure high net incomes one way or the other.

With more public investment and stronger measures to boost wage growth, the German government has a golden opportunity to ensure that its longer term prosperity is bolstered and that the fruits of its current export success are more evenly spread among its citizens.

Taking advantage of this opportunity makes sense in another way too.

Despite the relative strength of the German economy and the calming of the Eurozone crisis over the past two years, Euroscepticism is rising fast in a country where hostility to European integration has been almost taboo in the post-World War II era.

The Alternative for Germany party, established just last year and with a central policy plank of abandoning the euro, is on the rise. It has averaged 10pc of the vote in the last three regional elections. Just this week a poll showed it having the support of one in ten voters nationally, making it the country's third best-supported party.

If it is attracting this level of support at a time when there is no crisis being played out stories in the media, its support would likely soar if the euro crisis re-erupted or if Germany were to slump into recession. The government would then be even more constrained in what it could.

It would surely be far better for Angela Merkel to act now, introducing policies that can be framed as good for Germany (as they would be), rather than running the risk of slump and/or a flare up in the euro crisis. As Mario Draghi, the man who runs the European Central Bank, said this week, "the risk of doing too little is greater than the risk of doing not enough".

Irish Independent

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