Germany’s problematic current account surplus
In contrast to China, Germany is still heaping up foreign assets
by David Marsh
Wed 20 May 2015
Alexandre Lamfalussy, the Belgian central banker whose death at the age of 86 was announced last week, used to relate how Karl Otto Pöhl, president of the German Bundesbank in the crucial years 1980-91, sometimes hid his penchant for hard work under a veneer of apparent indolence.
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One indication of Pöhl’s capacity for industrious forward-thinking came in a letter Pöhl (who died in December aged 85) sent as vice president of the Bundesbank to Chancellor Helmut Schmidt in March 1978, supporting the need to prevent undue appreciation of the D-mark to protect German exports and jobs. This was part of behind-the-scenes exchanges over Schmidt’s plans for setting up the European Monetary System, the forerunner of monetary union.
Pöhl told the Chancellor that, during the 1970s, Germany’s interests had switched towards holding down the excessive rise of its currency. ‘If the D-mark’s high valuation against the dollar continues, then this might not only endanger our economic recovery but also give rise to structural changes (transfer of production facilities abroad) that could lead to permanent massive unemployment. We must therefore have an urgent interest in sharing the pressure of revaluation on as many shoulders as possible.’
The interchange is especially relevant when Germany is on track for an even bigger current account surplus this year – 8.4% of GDP against 7.5% last year, according to the IMF – as a result of the fall of the euro, and the boost to German competitiveness, induced by poor European growth and continuous European Central Bank monetary easing.
At a time when current account surpluses in many other countries, notably China, Japan and a bevy of oil exporters such as Saudi Arabia and the United Arab Emirates, have been falling, Germany’s continuous excess of exports over imports stands out as a persistent source of international imbalance. The other important current account surplus country in the euro area is the Netherlands, with a surplus now of more than 10% of GDP, for similar reasons to those prevailing n Germany.
After a 10-year run of current account surpluses of around 6% or more, German officials are used to fending off reprimands from abroad about Germany’s exaggerated propensity to export. There is widespread recognition in German official circles that, if the German currency were to be re-established without the weaker countries in the euro area – and without a massive monetary stimulus in the form of the ECB’s €60bn-a-month programme of asset purchases under quantitative easing – then it would be closer to $1.50 than to $1.10.
The evident link between QE, the weakness of the euro and the German surplus gives German officials a straightforward rejoinder when, for example, Washington representatives harangue them about the German payments imbalance. Anyone (such as leading lights in the International Monetary Fund and the Obama administration), they say, who supports QE must necessarily expect that it would lead to a prolongation of the German surplus.
Figures from the Bank for International Settlements on the real (inflation-adjusted) trade-weighted exchange rates of Germany and China since the height of the financial turbulence in 2009 illustrate how the German surplus has now become inbuilt. Germany’s real exchange rate has fallen by 13% over that time – while China’s has risen 36% – showing why the Chinese current account surplus has fallen by two-thirds since the crisis, while Germany’s has risen. Germany seems to have taken over in 2014 from China as the world’s second-largest foreign creditor after Japan.
The unresolved imbroglio about Greece makes it likely that, sooner or later, Germany and other large creditors will have to accept write-downs on Greek debt. This shows how Germany’s current account surplus brings problems for the country itself, not just for its trading partners. Germany’s net foreign assets of €1tn are actually far less than the cumulative total of German current account surpluses over the past 15 years – because foreign debtors will never repay the full sum that they owe Germany, and the amounts owed have already been lowered through debt restructurings and valuation changes.
It’s time that Germany recognises that building up ever higher net foreign assets is a loser’s game. However, as long as QE in Europe persists in depressing the euro to levels that exacerbate German economic imbalances, the game will continue – to the overall detriment of the international economy.