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Frankfurt am Main | 22.01.2018

Weidmann: High current account surpluses reflect accommodative monetary policy

Bundesbank President Jens Weidmann has sounded a warning against attaching too much importance to Germany’s high current account surplus. Neither current account surpluses nor deficits are a good or bad thing per se, he explained at a conference in Frankfurt am Main hosted jointly by the Bundesbank and the International Monetary Fund (IMF). "It is appropriate for Germany to be running surpluses, since demographic change will hit the economy particularly hard," Mr Weidmann stated, arguing that the surplus is necessary to cushion the blow of this development.

According to Bundesbank data, Germany recorded a current account surplus of €201.5 billion between January and October 2017, making it the country with the world’s largest surplus.

Invest efficiently to reduce surpluses

In addition to demographics, Mr Weidmann cited the current low oil and commodity prices and the weak euro as factors contributing to the present surplus. "The heightened trade surplus is also a reflection of the ECB’s very accommodative monetary policy stance," the Bundesbank President continued.

Mr Weidmann rejected calls to raise public spending in order to reduce surpluses, explaining that, according to simulations, expanding public investment by 1% of GDP would lower the current account surplus by less than 0.1 percentage point. He reasoned that, instead, it would be worth considering a shift in public expenditure from consumption to investment. In addition, he made the case for boosting incentives for private investment.

Low wage inflation despite favourable labour market situation

Others attending the conference took a far more critical view of the current surplus. Maurice Obstfeld, the IMF’s chief economist, noted that, at present, not even half of the German surplus can be explained by factors such as demographic change – and this unexplained portion is quite controversial. According to Mr Obstfeld, one key reason for the surplus is the high saving ratio in Germany, with enterprises, in particular, having significantly raised their earnings in recent years without subsequently reinvesting them.

For Jens Suedekum, Professor of Economics at Heinrich Heine University Düsseldorf, low wage dynamics are one of the main reasons for the high current account surplus. While wages have risen in recent years, he continued, Germany has not yet completely caught up with other countries in the euro area. In Mr Suedekum’s view, modest wage growth also explains why Germany imports relatively little. "This extra money that is earned on export markets is not shared enough with workers," Mr Suedekum criticised.

Raise investment or cut taxes

The issue of whether Germany needs to invest more was hotly debated among the conference participants. For Marcel Fratzscher, President of the German Institute for Economic Research, more public investment is essential as Germany is currently living off its resources. "It’s really mainly a result of good luck rather than good policy that Germany is doing so well," Mr Fratzcher explained, adding that the ECB’s monetary policy stance helped generate the current high interest savings for the public sector. He described any procyclical fiscal policy that involved using the fiscal surplus for tax cuts as a mistake.

By contrast, Lars Feld, a member of the German Council of Economic Experts, made the case for tax cuts. He called on Germany to comply with the debt-to-GDP ratio of 60% for the euro area, aiming at tax reform rather than additional public spending in order to achieve this. "A reduction of the German solidarity surcharge would help," Mr Feld said, referring to a topic currently being discussed in Germany.

Against the backdrop of the debate surrounding weak investment in Germany, President of the ifo Institute Clemens Fuest stated that it is not enough to simply invest more. "Domestic investment can be terribly inefficient," Mr Fuest commented. He cited infrastructure projects in Spain as an example of this – while Spain has invested extensively at the domestic level in the past, it was also particularly hard hit by the crisis.

Foster long-term growth

Chairing the concluding panel, Managing Director of the IMF Christine Lagarde stressed that Germany is not an island and that it has changed significantly in recent years, particularly in the face of demographic change but also as a result of migration. From the IMF’s perspective, she continued, the key priority must therefore be to raise long-term growth. "But clearly the recipes of the past, which have served Germany well, are not necessarily the recipes that are going to demonstrate effectiveness going forward," Ms Lagarde cautioned.

The IMF Managing Director noted that Germany also has many tools at its disposal to boost growth in the long term. In her view, Germany’s high current account surplus is a sign that the country is saving too much and investing too little. One tool is increased domestic investment, she remarked. Furthermore, she called on Germany to make greater use of its existing fiscal space, as studies have demonstrated the possibility of further reducing debt even with higher investment. Ms Lagarde urged Germany to take advantage of its current strong economic situation and pursue growth-friendly policies while the sun is shining: "It is time to repair the roof."

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