Economists back German public spending boost to offset surplus

21 Oct 16

The size of Germany’s large current account surplus is a threat to the eurozone economy and the country should consider increasing public investment, according to a survey of economists.

The Centre for Macroeconomics and the Centre for Economic Policy Research surveyed macroeconomists working across Europe, receiving 67 responses.

Of these, more than two thirds agreed that the German surplus – which stands at 8.5% of gross domestic product – posed a danger to the eurozone economy. A slightly smaller majority agreed that Germany should increase public spending as a response to this surplus.

Germany’s current account surplus has overtaken China’s as the largest in the world. Since 2010, increases in the current account have been accompanied by fiscal surpluses, with Germany moving from a deficit of 4% of GDP in 2010 to a surplus of 1.2% in the first half of 2016.

Some commentators have taken the view that Germany’s current account surplus is potentially destabilising, particularly within a currency union where exchange rates are fixed.

The International Monetary Fund and the European Commission have both warned of the risks of the surplus, urging Germany to take action to reduce it. The US Treasury has also added to Germany to its ‘monitoring list’ of countries engaging in unfair currency practices, even though it uses the euro rather that its own currency.

German ministers, however, have claimed that the size of the surplus is an indicator of the competitiveness of Germany’s economy and global demand for its products.

The CFM/CEPR survey found that 69% of economists agreed or strongly agreed that German current account surpluses are a threat to the eurozone economy. One expert surveyed, Ricardo Reis of the London School of Economics, said current account imbalances played a central role in the 2010-12 eurozone crisis.

Michael Wickens of Cardiff Business School and the University of York commented: “Germany’s current account surplus reflects its competitiveness, but due to the single currency, it can’t appreciate against the eurozone countries with chronic current account deficits.

“It is all reminiscent of the failures of the Bretton Woods system, which of course eventually collapsed due to currencies becoming misaligned.”

When asked if the German government should increase public spending, 67% agreed or strongly agreed. The main policy recommendation is to boost spending through investment in public infrastructure.

Sweder van Wijnbergen of the Universiteit van Amsterdam noted that Germany’s public capital-GDP ratio is half that of the Netherlands. However, other respondents said increased investment in German infrastructure might be counter-productive, further enhancing the country’s productivity advantage.

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