Rethinking Europe, EconoMatters

The Germans Follow Keynes’ Advice!

If anything, the German Problem is complacency, not the current account surplus.

Credit: Paul Blair www.flickr.com

Takeaways


  • What's wrong with a small fiscal surplus when the economy is expanding at an above-trend rate?
  • The public infrastructure in Germany does not seem to be in any worse shape than elsewhere.
  • Would the U.S., UK or Spanish economies be better off if German companies were to invest their surplus at home?
  • Germany’s real problem is not the current account. The real problem is that success breeds complacency.

Is Germany not consuming enough? At 55%, the share of consumption in German GDP is lower than in most other developed countries.

Arguably, this could be seen as a problem for Germany. Its consumers could enjoy a better life today if they were to spend more.

However, record employment, political stability, ongoing gains in real wages and the current rise in GfK consumer confidence to a post-2001 high do not suggests that German consumers or workers believe that they are making the wrong choices.

Nor does it suggest that the government has made the wrong choices for them. The Agenda 2010 reforms of 2003/2004 turned Germany into a much better place to create jobs.

Wage moderation in return for job security

True, in the subsequent rebound in employment, German workers did not always ask for wage hikes fully in line with the improving outlook. That allowed companies to strengthen their balance sheets and create more jobs.

But the implicit deal between labor and corporates cuts both ways: When German GDP tanked by 5.6% in 2009, few workers were fired. Financial cushions and some well-targeted public spending helped companies to take the hit — without letting workers feel much pain.

As a result, workers do not tend to see their choice, namely enhanced job security in return for not fully exploiting any short-term leeway for higher wages, as being bad for them.

Their choice may also run counter to that being made by workers in some other European economies, but that does not mean the choice made in Germany is in any way inferior. It’s most likely the opposite.

On the corporate side, the German surplus could potentially be seen as a German problem. That would be the case if the penchant of German companies to spend some of their surplus abroad would be hurting Germany.

However, it is hard to find much evidence of macroeconomic relevance for that. On top of record employment, the rise in GDP per capita as the broadest measure of productivity has risen by 15.5% since 2005, far exceeding the 9.7% average gain in the OECD.

Ever since the Agenda 2010 reforms started to work, companies have invested enough in Germany to deliver above-average results for the German population. In this sense, the German economy does not suffer from an investment shortfall.

The Germans follow Keynes’ advice!

Observers urging the German government to embark on deficit spending today duck one major question: What’s wrong with a small fiscal surplus when the economy is expanding at an above-trend rate?

Isn’t that exactly what Keynes would have recommended? Berlin does not see the fact that the United States and the United kingdom are pursuing a less prudent fiscal policy as a problem that Germany has to address.

Of course, the contrast between deficit-funded demand abroad and a sustainable fiscal policy in Berlin is reflected in the current account. Incidentally, Germany’s fiscal gains since the early 2000s are not primarily the result of any harsh austerity.

Instead, they mostly reflect the major upturn in the labor market caused by the “Agenda 2010” reforms. As the number of people earning enough to pay into the welfare system has surged by 22% since early 2006, the fiscal accounts have swung into a small surplus.

(For all those who love these incomprehensibly long German words, check the statistics on “sozialversicherungspflichtige Beschäftigung”).

Infrastructure spending: Enough or not?

Whether or not the German government is spending enough on infrastructure is the subject of a heated debate between economists from the left, the right and the center.

Spending two-thirds of my working time travelling through Germany, Europe and the United States, I can add one observation: The public infrastructure in Germany does not seem to be in any worse shape than elsewhere.

To give an extreme example: The World Bank even ranks Germany as No. 1 out of 160 countries for the quality of trade and transport-related infrastructure in its 2016 Logistics Performance Index.

An alleged systematic underspending on public infrastructure cannot explain Germany’s fiscal balance and its current account surplus.

What’s wrong with creating jobs abroad?

So far, I have argued that the state of the German economy, including a current account surplus that seems to have peaked anyway, is not a problem for Germany.

But is it a drag on global growth, as The Economist argues? More precisely, is it such a global problem that the German government ought to override the apparent preferences of its citizens for fiscal prudence and job security and force a public deficit and higher labor costs upon them?

If the world suffered from an acute shortfall of global demand, a German reluctance to add to demand through counter-cyclical policies could be a genuine global concern.

In particular, if Germany hadn’t embarked on a well-targeted fiscal stimulus in 2009, the world would have had a genuine reason to complain.

However, given full employment in the United States, the United Kingdom, Germany, Japan etc., the world does not seem to be stuck in such a Keynesian situation today. To improve the global economic performance, we need to focus on supply more than on demand.

The domestic financial surplus of the German corporate sector means that, on top of creating a record number of jobs at home, German companies are also investing and creating jobs abroad.

German manufacturing jobs

Many of these jobs are well-paid manufacturing jobs. What’s wrong with that? German companies add to supply abroad.

Would the U.S., UK or Spanish economies really be better off if German companies were to invest their surplus at home? That would only add to the German employment boom.

If German car companies were to erode their surplus by paying their German workers much higher wages at home, some German tourists may indeed part with even more money in Disneyland or on Mallorca.

But would that really benefit U.S. workers, for whom German car companies may create fewer jobs if they have less savings to export? Also, if Germany saves less, borrowing cost for Spain and other countries might rise.

Moreover, Germany’s current account surplus looks set to shrink over time anyway, not least because the rising number of German retirees will likely draw down some of the savings they have stashed abroad over time.

As the overall economic adjustment seems well underway, the case for accelerating the process artificially looks weak.

Germany has to absorb roughly a million recent arrivals. Any advice that the government should intervene in the private sector wage-setting process to artificially raise labor costs (and hence barriers to labor market entry) for those often unskilled people seems unwise.

A case for more public spending?

Of course, the German government could usefully spend more on infrastructure, the digital economy, defense, child and nursing care.

However, it should not be overlooked that Berlin is already doing so. Every country has some problem areas. In Germany, the real infrastructure issues are typically on the regional and local level (bumpy local roads, leaking school roofs and the like). The federal government is not in control of such local spending.

Over recent years, the federal government has already diverted more tax receipts to state governments to enable them to spend more and pass on more money to the municipalities.

The real bottleneck in Germany is not lack of money. Instead, lengthy bureaucratic procedures needed before projects can be started to prevent a faster pace of infrastructure spending. Significant sums of money that have been designated to projects are not actually spent because of time-consuming procedures.

The real German problem

Thus, Germany’s real problem is not the current account. The real problem is that success breeds complacency.

Reaping the rewards of its “Agenda 2010” reforms, Germany has not introduced further pro-growth reforms since the 2010 decision to gradually increase the pension age to 67 years, a move master-minded by then SPD-minister Franz Müntefering.

Germany continues to enjoy a golden decade. But like a top athlete who is no longer training as diligently as she used to in the past, Germany will likely fall back slowly but surely over time.

In contrast, France — provided it follows through on Macron’s promise to deliver serious reforms similar to those that cured Germany’s erstwhile malaise from 2004 onwards — can overtake a complacent Germany and a Brexit-stricken United Kingdom as the most dynamic major economy in Europe in a few years.

It would then be France’s turn to enjoy a golden decade in the 2020s. If such a turnaround success materializes, should we then really start talking about “France’s problem?” I think not.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

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