Group #5 - Eleanor McEnaney, Ryan Werfelli, Thomas Goujat-Gouttequillet, Grace Devlin and Lori Janjigian Debate #5 December 3, 2014 Against Current Accounts Surpluses For years, Germany has held a strong global reputation due to a booming industry and record low unemployment since reunification. From 2002—and the introduction of the Euro as circulating currency—until 2008 and the onset of the financial crisis, Germany enjoyed a steady and, overall, massive improvement in its current-account balance. However, Germany’s “champion” status was a result of its ringing up easy wins against weak intra-European competition on the regional circuit. According to official statistics, in 2009 Germany’s exchange relations with the (at the time) fifteen other members of the Eurozone accounted for fully half of its overall current-account surplus (Rosenthal). The International Monetary Fund recently highlighted the resulting underlying problem in Germany--“Germany’s external position is substantially stronger than implied by medium-term fundamentals and desirable policy setting” (Boll). Germany has the largest current-account surplus in the world, which has produced large imbalances within Europe and beyond (Economist 1). This is not the first time that Germany’s high current-account surplus, which surpasses more than 7% of its economic output, has received criticism from the IMF. The German government does not believe its current-account surplus is a problem, and says that it is simply a byproduct of the strong competitiveness of German businesses. In other words, Germany is not willing to slow down its incredibly strong export machine. Domestic sectors in Germany are lagging behind, however, and the IMF continues to encourage the country to focus on increasing domestic investment and maintaining a more balanced current-account. We argue that policies more focused on boosting growth potential through higher public and private investment would raise domestic demand in Germany and result in positive externalities throughout the rest of Europe and the world (Boll). A joint report by the leading German institutes said the country’s external surplus will keep rising to a modern-era high of 7.9% of GDP this year, which is above the 6% limit set by Brussels under the new Macroeconomic Imbalance Procedure. The Commission has warned Germany that it will face sanctions if it fails to either boost domestic consumption or wean its economy off excess reliance on foreign markets. The US has also criticized Germany for creating a “deflationary bias” for the world economy and taking more than its fair share of scarce global demand. The implicit US criticism is that Germany has locked in a structural advantage through EMU, which prevents Germany's currency rising as the D-Mark used to do. This creates a permanently undervalued exchange rate, which not only hurts the EU but has secondary effects on non-EU countries (Evans-Pritchard). If the Euro were to depreciate to a point where the exports of struggling EU countries could become competitive, this would enable the Euro to stabilize and EU economies to recover. However, Germany’s large exports have increased

demand for the Euro, resulting in currency appreciation. Thus, the Euro’s value is currently stuck in purgatory because Germany’s trade surplus is too large to allow the Euro to depreciate enough to trigger economic recovery throughout Europe. One of the ways of measuring the current-account is through the difference between national savings and national investment (Ghosh and Ramkrishnan). Though Germany is proud of its current-account surplus, it also represents a shortfall of domestic investment in relation to national saving. Germany has underinvested in almost everything--from roads to education to factories (Economist 1). As a result, Germany has seen no significant growth in its GDP over the last two quarters, and over the last year domestic demand has been below 1%. Maintaining the current level of export service would require Germany to double its annual investment in infrastructure, which it has not yet done (Washington Post). Total investment has fallen from 21.5% of GDP in 2000 to 17.2% in 2013, and it has become increasingly clear that the German government is not investing enough in infrastructure or maintenance (Economist 2). Christoph Schmidt, chairman of the council of economic experts that advises the German government, has said that Germany needs to mainly focus on raising private investment. This is difficult in a freemarket economy, whereby the government cannot mandate firms to invest more at home than abroad (Economist 1). The export industry is also unfair to consumers, who pay above market electricity to subsidize cheap power for the export industry in order to support Germany’s surplus (Evans-Pritchard). Other demographic challenges, including an aging population and shrinking workforce, also pose issues (Economist 1). Even if domestic productivity improves significantly in Germany, this demographic pressure is such that potential economic growth could fall below 1% within a decade, according to the OECD. Raising productivity growth in Germany will require much higher investment in human and physical capital (Economist 2). Politics may be at the heart of this non optimal status quo. German politics are currently domineered by a grand coalition of Germany's two largest parties. Of the common goals tying the normally opposing forces together, one of the largest is a balanced budget by 2015 (Hudson). Thus, while large investments in infrastructure could stimulate the economy, boost the standard of living, and even increase the competitiveness of Germany’s export driven economy, this seems unlikely in the near-term. Germans have also not proven to be the world’s best investors-they have lost a lot of money abroad betting on U.S. subprime bonds and Spanish real estate. Investing at home would reduce this risk for Germans and help balance the world’s trade ledger (Boll). In all, through research it is clear that Germany’s current account surplus is detrimental for the EU as a whole. Due to their lack of investment in infrastructure and maintenance, as well as their low domestic demand and small amount of private investment, Germany, and therefore most of Europe, is headed for economic turmoil. It is incredibly important for Germany to reverse this trend by focusing on increasing domestic demand for their products as well as reallocating their money to domestic investments.

Works Cited Boll, Sven. "Is a Bloated Current Account Surplus the New German Disease?" Real Time Economics RSS. The Wall Street Journal, 29 July 2014. Web. 01 Dec. 2014. "Clouds Ahead." The Economist 2. The Economist Newspaper, 07 June 2014. Web. 30 Nov. 2014. Evans-Pritchard, Ambrose. "Germany Risks EU Fines with Record Current Account Surplus." The Telegraph. Telegraph Media Group, 04 Oct. 2014. Web. 01 Dec. 2014. Ghosh, Atish, and Ramkrishnan, Uma. "Do Current Account Deficits Matter?" IMF. N.p., Dec. 2006. Web. 01 Dec. 2014. Hudson, Alexandra. "Merkel Says Germany Will Not Soften Its Strict Budget Stance." | Reuters. N.p., 14 Oct. 2014. Web. 02 Dec. 2014. . Rogoff, Kenneth. “Germany’s current account surplus is a wider issue than it first appears.” The Guardian. 10 Apr. 2014. Web. 01 Dec. 2014. Rosenthal, John. "Germany and the Euro Crisis: Is the Powerhouse Really So Pure?" World Affairs Journal. N.p., n.d. Web. 02 Dec. 2014. "The Sputtering Engine." The Economist 1. The Economist Newspaper, 22 Nov. 2014. Web. 01 Dec. 2014.