Evi Pappa's picture
European University institute
Professor of Economics

Voting history

German current account surpluses


Question 2: Do you agree that the German government should increase public spending given its persistently large current account surplus and given that it is part of the Eurozone?



Confidence level:
Germany's sound fiscal position provides space for a less restrictive fiscal policy; the rise in German demand could reduce the external surplus and help to achieve a rebalancing in the EA. Kollman at al (2014) estimate that this effect is small. In my own research, I also show that fiscal consolidation, as a means to induce an internal devaluation in a two country model works, but it affects very little economic activity in the Periphery. Reversing the argument, I would expect that in the most recent two-country DSGE models of a monetary union that we use for policy analysis, fiscal expansion could also lead to internal appreciations but the effect that the latter would generate would be quantitatively small. A more effective way for correcting current account imbalances is transferring resources from Germany to the periphery. Given that this is not feasible politically, and alternative way to achieve the same outcome is by promoting foreign direct investment from Germany to the periphery of the Eurozone.