A week or so back I took a sarcastic jab at economist Heleen Mees for suggesting - on thin evidence - that the German current account surplus was "less damaging" than China's. Since then, there has been some back-and-forth among actual experts fellow commentators over what to make of Germany's fantastical export-driven growth.
Tyler Cowen argues that "German imports have risen to new highs and it is also apparent that the Germany economy is a positive-sum locomotive for most other countries. And a lot of the German exports contribute to the productive capacity of other nations." Tyler would seem to side with Ms. Mees on this one. However, in making this statement he cites an FT editorial as backup, which - by its editorial nature - is light on details.
Meanwhile, Wolfgang Munchau argues that Germany's economic strength could well be toxic for the rest of the eurozone. Germany's growth should be offset by an adjustment in consumer demand and labour costs within the eurozone. But since the eurozone is an imperfect market, this adjustment is not happening. The resulting imbalances have already contributed heavily to Europe's current sovereign debt crises and are an ongoing threat to the long run health of the eurozone, he argues.
So who is right? The lack of quantitative evidence in this discussion sort of leaves you hanging. My suspicion is that both sides are right, but one side is, um, righter. Let me explain.
In terms of the specifics, Tyler's point is correct: Germany's exports are a locomotive for growth. Trade is good for both exporting and importing economies. Similarly, Germany's re-investment of its funds into neighbouring countries will, in many (though not all) cases, lead to growing productivity. Both of these factors are positive.
But are they positive sum? In other words, do the positive aspects cancel out the negative factors that result from ensuing current account imbalances? That's far from clear.
I would argue that the sovereign debt problems in Southern Europe are in fact a collective European problem: it is not simply a story about profligate deficit spending in Greece, Italy and Spain. In the case of intra-eurozone trade - given the fixed exchange rate - someone's current account surplus is someone else's current account deficit. Greece and Italy don't have the option of devaluing their currency to stay competitive because they do not have their own currency. To adjust, they must cut costs and deflate, and somehow "increase productivity." They have obviously been reluctant/unable to do this, and the resulting crisis and severe austerity measures have deepened the recession in Europe. Clearly, this impacts negatively on their European neighbours who have to bail them out or risk having the eurozone collapse.
It may be true that Germany's capital account is not in surplus due to their high levels of foreign direct investment into neighbouring countries. However, for this to be positive sum this capital needs to be 1) invested in productive enterprises AND 2) the productivity gains must offset the imbalances produced by German growth. From the current state of Southern Europe, point 1) is potentially true while point 2) most definitely isn't. This is likely what Mohammed El-Erian means when says that the positive spillover effects from Germany's export growth have been "immaterial."
Does this mean that Germany should slow its economic growth? Of course not. But it does mean that there needs to be a recognition that "surplus=good, deficit=bad" is not a helpful paradigm: balance is important. Unfortunately, the current state of European institutions do not create effective incentives for maintaining that balance. We've already seen the results. A reluctant-to-reform Greece needs to be saved by a reluctant-to-bailout Germany. The euro can't carry on like this, not forever.
I will borrow my conclusion from a recent paper by Barry Eichengreen and Peter Temin:
"The point is that an exchange rate system is a system, in which countries on both sides of the exchange rate relationship have a responsibility for contributing to its stability and smooth operation. The actions of surplus as well as deficit countries have systemic implications. Their actions matter for the stability and smooth operation of the international system; they cannot realistically assign all responsibility for adjustment to their deficit counterparts. This was the lesson that Keynes drew from the experience of the Great Depression. It was why he wanted taxes and sanctions on chronic surplus countries in the clearing union proposal that he developed during World War II. Sixty-plus years later, we seem to have forgotten his point."
