Dr. Workie on The Prohibited Fruits for Germany

Business and Management Associate Professor Dr. Menbere Workie is publishing a monthly commentary on economics and finance in HN Komentare, the most readable Economic Newsletter in Slovakia and the Czech Republic. His latest commentary was dealing with the question of what makes the German economy so successful:

The prohibited fruits for Germany

Germany is a country with the largest current account surplus in the world, accounting nearly 8% of its GDP. There is a heated debate on why Germany has been so successful for such a long time, mainly in light of a stagnating economic performance in the Eurozone countries and persistent external imbalances elsewhere in the world. In the crowd of so many borrowers, Germany indeed looks like a “stranger“. It reminds me of the proverb that accurately characterizes this: “in a country where everyone is naked, a stranger is the one who is dressed”.

What makes the German economy so successful? In short, the German economy is more competitive compared to its rivals and produces goods and services that are highly demanded in the world. As a result, it has a current account surplus accompanied by a deficit in its financial account. Germany also holds more private and public savings than it has investments. In a way, Germany is an economy that is running in line with a textbook economic theory. Moreover, Germany has also been running a budget surplus in recent years.

Nonetheless, Germany’s success in achieving a current account surplus has a remarkable impact on the external imbalances of the rest of the world, predominantly in the Eurozone countries. Indeed there have been hard criticisms of  Germany’s economic success both by the IMF, the European Commission and the United States. The main argument is linked with presumably weaker Euro given the dynamics of the German economy and that Germany should take measures to strengthen the value of the Euro currency. China has been under similar pressure, mainly from the United States and made some adjustments to curb its then mounting current account surplus.

The problem with Germany is that it does not have its own currency and therefore its monetary issues belong to the ECB. Moreover, the appreciation of the Euro may harm the competitiveness of countries that are struggling with deficits. It is also legitimate to doubt the role of the exchange rate, since the countries with independent monetary policy have not managed to successfully reduce their deficits either. This suggests exchange rate alone cannot explain everything in this regard.  

What are the options for Germany to reduce its current account surplus? Germany is advised to increase its aggregate demand, reduce savings, increase investment and run a deficit in its current account balance. Germany has already taken some steps in this direction; nonetheless, given the size of the surplus in its current account of the balance of payments, it turns out it is way too small to avert the status quo. As John Maynard Keynes precisely stated in 1941, “adjustment is compulsory for the debtor and voluntary for the creditor”. In short, Germany as a creditor country is not under pressure to undertake adjustments.