In a world increasingly characterized by a global savings glut, Germany stands out as the major industrialized country that has the largest external current account surplus. This should be a real concern to the United States since Germany’s external imbalance is now constituting an important headwind to the US economic recovery by dimming US export prospects. It is doing so in much the same way as China’s external imbalance did before. Of particular concern is the fact that policies in both Germany and Europe are pointing to a further increase in this imbalance in the immediate term.
According to the IMF’s recent World Economic Outlook report, Germany’s external current account surplus has widened to around US$300 billion, which makes it even larger than that of China. More striking yet is the fact that Germany’s current account surplus is expected to reach as much as 8 ½% of GDP in 2015 at a time that China’s external surplus is expected to have narrowed to 3 ¼% of GDP. An implication of Germany’s widening current account surplus, is that the recent relative strengthening in the balance of payments position of the European economic periphery has not been achieved through a re-balancing within Europe. Rather it has been achieved at the expense of the rest of the global economy.
As Germany’s current account surplus has widened, the US economic recovery has stalled in part due to a less favorable external position. Sadly, there is every reason to expect that this situation will worsen further in the period immediately ahead considering Germany’s present budgetary policy and the European Central Bank’s recent resort to quantitative easing.
A German budget policy geared towards attaining structural budget balance is likely to increase German savings, which has been a principal contributor to the country’s large current account surplus. Meanwhile the ECB’s unorthodox monetary policy is likely to lead to a further weakening in the Euro that will further favor the German export sector. In that context, it has to be of concern that over the past year the Euro has already depreciated by more than 20 percent against the US dollar.
Over the past decade, when China’s external surplus constituted a threat to the US economy, the US Administration leaned heavily on China to allow for a more rapid appreciation of its currency. Now that Germany’s current account surplus has reached such a large dimension one would think that the US Administration should be pressing harder than it is now doing for more expansionary demand policies in Germany in general and in the budgetary area in particular. Since such expansionary policies are now very much needed to limit the degree to which Germany is free riding the global economy.
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