Germany's Economy Needs More Investment
Few countries attract as much disdain from economists as Germany. Berlin is accused of running an excessively prudent budget and German companies of paying their workers too little: This stinginess -- so the accusation goes -- has contributed to global instability by making it harder for Germany’s euro-zone partners to climb their way out of the crisis.
The criticisms, which go back about a decade, seem harder to sustain now: German wages are rising again, and while the government is running a surplus, it is more difficult to make the case for greater spending during an economic expansion. The problem is that Germany needs to make up now for what it failed to do in the past: Wages must not only increase, but compensate for years of excessive moderation.
This sizable gap in public and private investment needs to be filled, a worthy focus for the new coalition government. A boost in German consumption and investment would create some additional demand for Germany’s euro-zone partners. Greater investment in companies or infrastructure would also lift German productivity, which has been far from impressive over the past decade.
The great debate over German economic policymaking was held at a conference in Frankfurt last week, jointly run by the International Monetary Fund and the Bundesbank. The case for a change of paradigm in Berlin was eloquently made by Maurice Obstfeld, the IMF’s chief economist, who -- alongside his predecessor Olivier Blanchard -- has long argued that Germany should reduce its external surplus to improve financial stability.
Germany’s current account surplus stood at nearly 8 percent of gross domestic product last year. According to the IMF, this is nearly 4.5 percentage points higher than it should be. Roughly a third of this excessive external surplus is the result of overly tight fiscal policy.
Obstfeld pointed out that, at the moment, these extra savings end up funding projects abroad. This carries some risk since in case of a default abroad (private or sovereign) the money would be lost. Conversely, Germany could reap high returns by investing in infrastructure at home. And since most of the savings come from the corporate sector, encouraging companies to invest could also lower inequality.
The problem with the IMF analysis is its timing rather than its substance. Few have doubts that Germany’s surplus is truly extraordinary: As Guntram Wolff, the director of the Brussels-based think tank Bruegel, noted, if one looks at all countries in the world over the last two decades, there’s only a handful of examples of countries that are not commodity producers that ran a current account surplus at nearly 8 percent of GDP, for three consecutive years. But it is much harder to make the case for greater government spending now that the euro-zone economy is booming. As Bundesbank President Jens Weidmann noted, an economy going at full steam does not generally require an injection of more spending. (Of course, he put it more technically: “A positive output gap does not signal a need for an expansive fiscal policy stance.”)
As for wages, even Peter Bofinger, a member of the German Council of Economic Experts and a long-running advocate of higher pay in Germany, admits that these are now rising. Between 2012 and 2017, compensation per employee in Germany rose on average by more than 2 percent a year. This was more than any other country from the G-7 and in line with the inflation target of the European Central Bank. “We cannot say there is a fundamental problem with wages in Germany,” he conceded.
Still, the problems of the past do not simply disappear; it will be up to Germany’s new coalition government to find ways to deal with them. As Jens Suedekum, a professor at Heinrich Heine University, noted, Germany’s wage moderation led to a grossly undervalued real exchange rate in the early years of the euro zone, which artificially boosted exports. Germany’s stronger wage growth since the crisis has not been sufficient to make up for the gap in competitiveness that has accumulated since.
Meanwhile, Germany has accumulated a large investment gap, both private and public: Public investment, while stable, remains at a meager 2 percent of GDP. As noted by Wolff, gross fixed capital formation (the net increase in physical assets) in the manufacturing sector is now lower than in Italy.
Had Germany addressed these problems earlier, it would be in the position to ignore them today. But Germany’s past restraint means the case for a demand boost remains compelling. That is likely to be music to the ears of the Social Democrats, Chancellor Angela Merkel’s coalition partner, though there is a risk that they will prefer giveaways to investment. Higher wages and greater investment spending would also make it easier for the ECB to reach its target of just below 2 percent and bring to an end its unorthodox monetary policy measures. Surely even the most conservative in Germany would agree this is a good thing.
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Therese Raphael at email@example.com