German current account surpluses

Wednesday, October 12, 2016

====================================================================

Question 1: Do you agree that German current account surpluses are a threat to the Eurozone economy?

====================================================================

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?

====================================================================

Summary

The October 2016 expert survey of the Centre for Macroeconomics (CFM) and the Centre for Economic Policy Research (CEPR) invited views on Germany’s trade surplus, its impact on the Eurozone economy and the appropriate response of German fiscal policy. More than two-thirds of the 67 respondents agree with the proposition that German current account surpluses are a threat to the Eurozone economy. A slightly smaller majority believe that the German government ought to increase public investment in response to the surpluses.

Whereas previous CFM surveys only included UK-based macroeconomists, this survey, conducted with the CEPR, asked a wider panel of macroeconomists based across Europe.

Background

Germany posted a record-high current account surplus of 8.5% of GDP in 2015; indeed, the German surplus has overtaken China’s surplus as the largest in the world. Germany’s current account was slightly in deficit when the euro was created in the late 1990s, it steadily increased in the early 2000s and has continued to rise since the global financial crisis of 2008. Since 2010, the increase in the current account has been accompanied by fiscal surpluses, with the German government moving from a deficit of 4% of GDP in 2010 to a surplus of 1.2% in the first half of 2016.

Global imbalances

Through the prism of the trade balance, the current account surplus can be viewed as a symptom of Germany’s economic success. German exports increased from 30% of GDP in 2000 to 47% in 2015. But with imports at merely 39% of GDP, this implies that Germany is providing capital to the rest of the world at a very high rate. Indeed, German savings have increased from roughly 20% to nearly 30% of GDP, while domestic investment has remained roughly constant at around 20% of GDP.

One view, harking back to Keynes, is that such large capital flows could be very destabilising, particularly within a system of fixed exchange rates (or a currency union). The argument is that while countries with current account deficits may come under severe pressure to adjust, countries with surpluses face no corresponding pressures.[1] Keynes’s solution – which was part of the inspiration for the creation of the International Monetary Fund (IMF) – was that occasional exchange rate adjustments might be necessary in order to rebalance international credit flows.

A number of commentators have suggested that Germany’s large current account surpluses reflect such imbalances. Paul Krugman attributes the Eurozone crisis in part to Germany’s current account surplus. The capital flows that this current account financed dried up as the crisis unfolded. But the burden of the adjustment fell solely on the Eurozone periphery, which closed their current account deficits, without the aid of Germany where the current account has only increased. In this view, German fiscal surpluses are an international version of the paradox of thrift.[2]

The IMF[3] and the European Commission[4] have both warned of the risks of Germany’s current account surpluses; and both have urged Germany to take actions to reduce its external surplus, for example, by increasing public investment.

While the nature of the Eurozone makes exchange rate adjustments impossible, the IMF reckons that Germany’s real exchange rate is now 15-20% undervalued.[5] The US Treasury has gone so far as to add Germany to its ‘monitoring list’ of countries engaged in ‘unfair currency practices’, even though Germany does not have a national currency.[6]

In contrast, Jens Weidmann, President of the Bundesbank, has argued that German net capital outflows are primarily structural, resulting from Germany’s high level of economic development and ageing population. He also argues that the Eurozone’s common monetary policy allowed slower current account adjustments, thus mitigating the Eurozone crisis.[7] The German economics ministry claims that Germany’s surplus is ‘a sign of the competitiveness of the German economy and global demand for quality products from Germany.'[8]

The first question in our survey addressed the question of whether large German surpluses are reasons for concern. To focus the question, we asked the experts about its consequences for the Eurozone, but they were free to address wider implications in their comments.

Question 1: Do you agree that German current account surpluses are a threat to the Eurozone economy?

Sixty-seven panel members answered this question and a large majority (69%) agree or strongly agree with the proposition. A number of panel members point to evidence of the risks of current account balances. Ricardo Reis (London School of Economics, LSE), for example ,says that ‘current account imbalances during 2000-08 played a central role in the Eurozone crisis of 2010-12.'[9]

Other panel members suggest that German current account surpluses are a symptom of the common European currency. Michael Wickens (Cardiff Business School and University of York) warns that ‘the main underlying problem is the single currency. 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.’

Simon Wren-Lewis (Oxford) agrees that ‘the surplus represents an undervalued real exchange rate in Germany, which requires more inflation in Germany relative to the rest of the Eurozone.’

Wouter Den Haan (LSE) suggests that the problem is exacerbated by conditions in the Eurozone periphery: ‘There is a very good chance that the Eurozone is in a bad equilibrium in which consumers do not spend because they are concerned about future earnings and firms are hesitant to hire workers and raise wages because they are concerned about demand for their products. Even if this is not behind the high savings rate in Germany, it does make this increase in precautionary savings more problematic in the periphery.’

A number of panel members (Charles Bean, LSE, and Jonathan Portes, National Institute of Economic and Social Research) warn that Germany’s current account surplus is not uniquely a Eurozone problem, but is also large enough to contribute to the low global real interest rates.

The global dimension is also the main counter-argument of the panel members who think that the German current account is not a threat to Eurozone stability. Robert Kollman (Université Libre de Bruxelles) points out that ‘the German current account surpluses do not represent a threat to the Eurozone economy, because Germany trades more with the rest of the world than with the rest of the Eurozone.’

Pietro Reichlin (Università LUISS G. Carli) caveats his concern about the German current account with the view that ‘part of the surplus is due to exports to extra-European countries and these benefit some EU peripheral economies that are exporting intermediate inputs and parts to Germany.’

Others do not feel that there are theoretical grounds for concern about the German current account. Francesco Lippi (Università di Sassari) argues: ‘I do not see why the savings of my neighbour should be a problem for me. Rather, they are a potential source of financing my investment. I do not know a single reasonable model where current account surpluses are a problem.’

Robert Kollman points to research that the key shocks driving the German current account shocks are not central to the Eurozone’s ills.[10] Nezih Guner (Universitat Autònoma de Barcelona) agrees that German current account surpluses are structural: ‘current account surpluses partly reflect positive supply shocks (such as labour market reforms that lowered wages and made German economy more competitive) and the current demographic structure that results in high savings rates.’

Germany’s fiscal policy

With exchange rate adjustment off the table within a currency union, the main policy recommendation to reduce Germany’s current account surplus has been a change in German fiscal policy. Martin Wolf points out that the current account surplus is driven primarily by an increase in the supply of savings of German households and thus reflects insufficient aggregate demand.[11] He warns that Germany isn’t carrying its weight in the global economy and has failed to contribute to global aggregate demand.

By this view, the German government’s move to fiscal surplus is a direct drag on the global recovery. The argument is that with interest rates at zero and other governments in worse fiscal positions, the German government should do more to contribute to European and global demand.

The IMF has called on Germany to ‘focus on raising potential growth and reinforcing rebalancing, which will also support the fragile recovery in the euro area’, including the use of fiscal resources to ‘boost high quality public investment’.

The European Commission concurs that ‘weak investment has contributed to the high and persistent current account surplus and poses risks for the future growth potential of the German economy.’ The Commission joins the IMF in suggesting that ‘there continues to be fiscal space for higher public investment, while complying with the rules of the stability and growth pact.’

In contrast, Jens Weidmann suggests that an expansionary German fiscal policy will do little to spur demand in the Eurozone periphery as the import component of Germany public spending is merely 9%. And while Willem Buiter agrees that Germany’s current account surplus is excessive, he thinks that fiscal expansion may not be consistent with German inflation stability and that the European Central Bank should finance fiscal expansions elsewhere.[12]

The second question in our survey asked the experts whether the current account imbalance is a reason for the German government to increase public spending. We were not asking whether public spending should increase for other reasons (say low interest rates) although current conditions may – of course – affect the answers given.

The question was explicitly conditioned on the fact that Germany is part of the Eurozone and we asked the respondents to answer from the point of view of the Eurozone. That is, when countries’ fiscal deficits are high, the Eurozone regularly demands that action is taken to reduce public spending: so does it similarly make sense for the Eurozone to ask Germany to increase public spending given its large current account surplus?

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?

Sixty-seven panel members answered this question with a large majority (67%) agreeing or strongly agreeing that the German government ought to increase public spending in response to the current account surpluses.

Panel members who think that the German current account poses risks to Eurozone stability largely supported policy action. The main policy recommendation is an increase in public investment. Stefan Gerlach (BSI Bank) proposes that ‘more public spending on specific public infrastructure projects that pass a careful cost-benefit analysis and contributes to economic growth would be desirable.’

Sweder van Wijnbergen (Universiteit van Amsterdam) notes that ‘Germany's (public capital)/GDP ratio is HALF of the comparable ratio in the Netherlands.’ In contrast, Nezih Guner thinks that public investment might be counterproductive: ‘Public spending on investment incentives or infrastructure, for example, can further enhance the productivity advantage of German economy and can very well make the situation worse.’

Another argument in favour of a German fiscal expansion relates to the asymmetry of fiscal rules in the Eurozone. Costas Milas (University of Liverpool) points out that ‘the EU Treaty talks about “corrective” fiscal measures when the deficit exceeds 3% of a country's GDP. There is no similar mechanism in case of a (relatively) big fiscal surplus.’

Ricardo Reis, on the other hand, states that ‘the Treaties do not put the European institutions in charge of aggregate demand management. Therefore it makes perfect sense for there to be a pronounced asymmetry between requiring the reduction of fiscal deficits, but having nothing to say about fiscal surpluses.’ But he does suggest that discretionary policy is desirable at this point in time: ‘It seems likely that both Germany and the rest of the Eurozone would benefit from some fiscal expansion in Germany… Given the increase in the primary surplus since 2004, there also seems to be some room to do so.’

A number of panel members support policy action, but not an increase in public spending. Francesco Giavazzi (IGIER, Università Bocconi) and Nicholas Oulton (LSE) advocate tax cuts. In addition, Jürgen von Hagen (Universität Bonn) warns that fiscal action is desirable at the federal level, but not at the state level: ‘Lander public finances are mostly unsustainable and an increase in spending is not called for.’ Wendy Carlin (University College London) proposes increasing incentives for women to participate in the labour force.

Panel members who are opposed to German fiscal action largely point to the limited evidence that such action would reverse the current account surplus. Gernot Müller (Eberhard-Karls-Universität Tübingen) points out that ‘evidence to date suggests that the link between fiscal policy and the current account is weak. In fact, not even the sign of how a fiscal expansion impacts the current account is clear (see Kim and Roubini’s 2008 paper on twin divergence).’

Evi Pappa (European University Institute) adds: ‘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. A more effective way for correcting current account imbalances is transferring resources from Germany to the periphery.'[13]

====================================================================

References:

Bandeira, G., E. Pappa, R. Sajedi, and E. Vella (2016) ‘Fiscal Consolidation in a Low Inflation Environment’, available at https://me.eui.eu/evi-pappa/wp-content/uploads/sites/361/2016/10/GERE_October.21.pdf

Kim, S., and N. Roubini (2008) ‘Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange rate in the U.S.’, Journal of International Economics 74: 362-83.

Kollmann, Robert, Beatrice Pataracchia, Rafal Raciborski, Marco Ratto, Werner Roeger, and Lukas Vogel (2016) ‘The Post-Crisis Slump in the Euro Area and the US: Evidence from an Estimated Three-Region DSGE Model’, European Economic Review 88: 21-41.

Kollmann, Robert, Marco Ratto, Werner Roeger, Jan in’t Veld, and Lukas Vogel (2015) ‘What Drives the German Current Account? And How Does it Affect Other EU Member States?’, Economic Policy 30: 47-93.

====================================================================

Notes

[1] https://www.brookings.edu/blog/ben-bernanke/2015/04/03/germanys-trade-surplus-is-a-problem/

[2] http://krugman.blogs.nytimes.com/2013/11/01/the-harm-germany-does/?_r=0

[3] IMF 2016 Article IV consultation for Germany: http://www.imf.org/external/pubs/ft/scr/2016/cr16202.pdf

[4] European Commission Country Report Germany 2016: http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_germany_en.pdf

[5] See page 7 of the IMF report referenced in footnote 3

[6] https://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/2016-4-29%20(FX%20Pol%20of%20Major%20Trade%20Partner)_final.pdf

[7] http://www.bis.org/review/r140318a.pdf

[8] http://www.spiegel.de/international/germany/germany-defends-trade-surplus-after-critical-us-treasury-report-a-931126.html

[9] See http://cepr.org/active/publications/discussion_papers/dp.php?dpno=9493 and http://www.nber.org/papers/w17877

[10] See Kollmann et al (2016, 2016)

[11] https://www.ft.com/content/7fcb38e8-15f5-11e6-9d98-00386a18e39d

[12] https://www.linkedin.com/pulse/german-current-account-surplus-willem-h-buiter

[13] See Bandeira et al (2016)

How the experts responded

Global imbalances

Participant	Answer	Confidence level	Comment
Sir Charles Bean London School of Economics	Strongly agree	Extremely confident	While there are demographic reasons for Germany to be running a small surplus at the current juncture, the size of the present surplus is entirely disproportionate. This is not only complicating adjustment within the euro area, it is also contributing to the downward on the global real interest rate. That in turn adds to the pressure on central banks to keep policy rates at unusually low levels with all the adverse side effects that causes. The German surplus is not only a threat to the euro area economy but also to the global economy.
Jonathan Portes KIng's College, London	Strongly agree	Extremely confident	No one is arguing that Germany does not produce high quality goods which the rest of the world wants to buy. And there are demographic reasons why some surplus makes sense. But the current level of the surplus imies capital outflows which are simply too high; at some point they will be reversed and the adjustment may well be painful. This is not just an intra-euro zone issue
Jan Eeckhout University College London	Disagree	Confident
Gianluca Benigno London School of Economics	Neither agree nor disagree	Confident	In my opinion the surplus would be a problem from a Eurozone perspective insofar it reflects a shortage of aggregate demand in Germany. Given the current situation of stagnation of the Eurozone the persistency of this surplus can exacerbate the Eurozone's growth problem.
Ray Barrell Brunel University London	Strongly agree	Very confident	The survival of the Eurozone depends upon the balance between the recognition that European polities have to comprise to maintain political stability and the pressures on those polities from the economic stresses caused by the political compromise that the Eurozone represents. If Germany is undervalued then its partners must on average be overvalued, and adjustment to overvaluations in France, Italy and Spain can be painful, as it can only come by having lower inflation that in Germany. None of these countries has a particularly flexible labour market. Unemployment will for a period be higher than otherwise in these countries, and real wage growth will be slower. The current cconomic stresses seem rather high in these countries, and they could go on for some years. This in turn may lead to political threats to the Eurozone, and also to the liberal democracy that has been essential for maintaining the longest period of peace in Europe since the 17th century. As these threats rise, Many people in Europe consider that what has happened so far is better than having their countries invaded by the Germans again, and they are sure if the German polity wishes to control their mineral and industrial assets again they will pay In cash to do so. The balance of advantages may be changing, and a new compromise may be needed, with Germany taking the lead in this. The scale of relative overvaluation depends upon what one judges the private sector structural surplus to be, and in our non-Ricardian world on on the scale of government surpluses. Changing the German public sector surplus would be an obvious step to take to maintain stability and democracy.
Nezih Guner CEMFI	Disagree	Confident	I think German current account surpluses partly reflect positive supply shocks (such as labor market reforms that lowered wages and made German economy more competitive) and the current demographic structure that results in high savings rates. While the short term need for stronger demand from Germany to boost the Eurozone economy is clear, since the causes of German current account surpluses are more structural, they can only be addresses in the medium run. Furthermore, I think the challenge is to find economic mechanisms to handle such imbalances within a currency union. This will most probably will require further coordination of fiscal and labor market policies within the Eurozone and signalling Germany as a threat can slow down (rather than speeding up) establishing such mechanisms.
Per Krusell Stockholm University	Disagree	Confident	I am more concerned with medium- to longer run economic performance and from this perspective German spending should be based on cost-benefit analysis. Moreover, the public spending considered unlikely has much effect abroad, especially in the periphery; it is unlikely to have strong demand effects. Stronger demand is also unlikely to be sufficient for turning the periphery around (because of structural problems - which should be addressed first). I would be more positively inclined toward direct transfers to the periphery conditional on the money going to support the unemployed (or in other ways helping those in need) during a structural transition. Germany is not to blame for structural problems in the economies in the periphery and I think much of the arguments in this debate rest on ethics of this sort. Germany is to blame for their early runup in debt (sending the signal that high debt is "ok") but that is only vaguely related to the present issue.
Ricardo Reis London School of Economics	Agree	Very confident	Current account imbalances during 2000-8 played a central role in the Eurozone crisis of 2010-12 (http://cepr.org/active/publications/discussion_papers/dp.php?dpno=9493) and are more generally a frequent signal of financial and macro stresses (http://www.nber.org/papers/w17877). Therefore, a large and continued current account surplus should be cause for some concern, for Germany, the Eurozone, and the rest of the world. At the same time, this does not imply that normalization of the current account should occur very quickly or require bold policies (http://cepr.org/active/publications/discussion_papers/dp.php?dpno=9933) .
Robert Kollmann Université Libre de Bruxelles	Strongly disagree	Very confident	The German current account surpluses do not represent a threat to the Eurozone economy, because Germany trades more with the Rest of the World (ROW) than with the Rest of the Eurozone (the share of the ROW in German trade is rising steadily). The rise in the German current account surplus mainly drives up the current account surplus of the Eurozone as a whole. If anything, the German current account surplus is a symptom of weak demand in the rest of the Eurozone--the German current account surplus does not cause Eurozone problems! The key challenge for the Eurozone is solving the deep structural problems in France, Italy and periphery countries, and the weakness of Eurozone banks (Kollmann et al., 2016) Kollmann et al. (2015) present a thorough empirical analysis of the German current account, based on an estimated detailed dynamic macro model of Germany, the Rest of the Euro Area, and the Rest of the World. That study finds that the German CA surplus reflects a range of factors, such as the unfavourable demographic outlook for Germany, strong demand for German products by emerging economies, and German labor market reforms that have made Germany more competitive. The key shocks that drive the German current account have a surprisingly weak effect on real activity and inflation in the rest or the Euro Area. Depressed real activity in the Rest of the Euro Area mainly reflects home-grown problems. References: Robert Kollmann, Beatrice Pataracchia, Rafal Raciborski, Marco Ratto, Werner Roeger and Lukas Vogel, 2016. "The Post-Crisis Slump in the Euro Area and the US: Evidence from an Estimated Three-Region DSGE Model", European Economic Review, 2016, Vol. 88, pp. 21-41. Robert Kollmann, Marco Ratto, Werner Roeger, Jan in’t Veld and Lukas Vogel, 2015. "What Drives the German Current Account? And How Does it Affect Other EU Member States?", Economic Policy, 2015, Vol. 30, pp.47-93.
Philippe Bacchetta Université de Lausanne	Agree	Very confident
David Cobham Heriot Watt University	Agree	Confident
Mathias Thoenig DEEP-HEC, University of Lausanne	Disagree	Confident
Elias Papaioannou London Business School	Disagree	Confident
Francesco Giavazzi IGIER, Università Bocconi, Milano	Agree	Confident
Morten Ravn University College London	Neither agree nor disagree	Confident	I think the right questions surround how most effectively to address the poor state of many southern European economies. It is far from clear that a German stimulus is the most appropriate instrument in this dimension given that only a share of higher German demand would directly impact on southern Europe. The most fundamental issues to be addressed concern the high incidence of unemployment in southern europe and the state of the financial sector. Current policies are sacrificing younger generations' life opportunities and this has to be addressed with some urgency. It is not clear to me that a German stimulus is the solution to this.
Claudio Michelacci EIEF	Strongly agree	Extremely confident
Fabien Postel-Vinay University College London	Neither agree nor disagree	Confident
Pietro Reichlin Università LUISS G. Carli	Agree	Confident	Some caveats: part of the surplus is due to exports to extra-European countries and these benefit some EU peripheral economies that are exporting intermediate inputs and parts to Germany. I also agree that the excess saving in Germany is a consequence of ageing population and that boosting aggregate demand in Germany may not be sufficient to generate larger imports from peripheral Europe (as some of the peripheral EU countries suffer from lack of competitiveness). Overall, I agree with the statement but I see no easy way out.
Sean Holly Cambridge University	Agree	Confident
Wouter Den Haan London School of Economics	Agree	Confident	There is a very good chance that the Eurozone is in a bad equilibrium in which consumers do not spend because they are concerned about future earnings and firms are hesitant to hire workers and raise wages because they are concerned about demand for their products. Even if this is not behind the high savings rate in Germany it does make this increase in precautionary savings more problematic in the periphery.
Andrew Mountford Royal Holloway	Neither agree nor disagree	Confident
Sir Christopher... London School of Economics	Strongly agree	Extremely confident	The Eurozone economy needs additional spending to restart robust growth. Because of the size of Germany's surpus savings in the Eurozone as a whole are too large and they prolong unemployment and recession in the periphery. The reason Germany has such big surprluses is that it has no currency to appreciate, so the existence of the Eurozone is giving it this facility. It should return part of it to the Eurozone otherwise political conflict will add to the economic problems that it is causing
Jürgen von Hagen Universität Bonn	Strongly disagree	Very confident
Etienne Wasmer Sciences Po, Paris	Strongly agree	Very confident
Joseph Pearlman City University London	Agree	Confident
Paolo Surico London Business School	Agree	Not confident
Stefan Gerlach EFG Bank	Agree	Confident
Franck Portier University College London	Disagree	Confident
Lucio Sarno Cambridge University	Agree	Very confident
Akos Valentinyi University of Manchester	Agree	Very confident
Panicos Demetriades University of Leicester	Agree	Very confident	Germany needs to find ways to spend some of its surpluses, which would also help to increase demand in the Eurozone periphery. This imbalance may well effect structural factors, as Jens Weidman suggests. It doesn't mean, however, that it shouldn't be addressed. Other countries are asked to make structural reforms to become more competitive and reduce spending. Germans should overcome the fear of spending!
Silvana Tenreyro London School of Economics	Agree	Confident
Harry Huizinga CentER, Tilburg University	Agree	Confident
Simon Wren-Lewis University of Oxford	Strongly agree	Extremely confident	It may be that some of the German current account surplus is structural. However believing that all or even most of the current surplus is structural is pure wishful thinking on the part of some. Instead the surplus represents an undervalued real exchange rate in Germany, which requires more inflation in Germany relative to the rest of the Eurozone. As long as Germany refuses to implement policies to bring this about, it is a threat to the Eurozone because it forces deflation elsewhere.
Giuseppe Bertola Università di Torino	Strongly agree	Very confident	The German surplus is much larger than what could be justified by ageing trends. Extreme reluctance to spend domestically is incompatible with adjustment of international imbalances with the eurozone, and results from fears that may sadly and self-fulfillingly be justified by prolonged stagnation or collapse of the eurozone.
Mirko Wiederholt Science Po	Agree	Confident
Ethan Ilzetzki London School of Economics	Agree	Not confident	It is hard to avoid the observation that the growing current account surplusses of Germany coincided with the advent of the Euro and the widening current account deficits in the European periphery. Given how matters have evolved in southern Europe, it's hard to think of this as a benign improvement in the allocation of capital within Europe. Now that that current account deficits in the European periphery have largely reversed, however, it is no longer clear to what extent this is an intra-European problem anymore. Having said this, if there were a global rebalancing that caused Germany to reverse its current account surplus by 8% of GDP, it is very hard to predict how things would unfold.
John Hassler Institute for International Economic Studies (IIES), Stockholm University	Agree	Confident
Alan Sutherland University of St Andrews	Agree	Confident
Jonathan Temple University of Bristol	Agree	Confident
Omer Moav University of Warwick	Disagree	Not confident
Jim Malley University of Glasgow	Agree	Confident
Paul De Grauwe London School of Economics	Agree	Very confident
Francesco Lippi LUISS	Disagree	Confident	I do not see why the savings of my neighbor should be a problem for me. Rather, they are a potential source of financing my investment . I do not know a single reasonable model where CA surpluses are a problem. The fact that one needs to resort to 70 year old theories, where prices and policies are exogenous , is a tell tale of how the the arguments are. But, since politics attaches a bad meaning to such budget surpluses, I do think it will be possible that such surpluses will become a political problem that might eventually threaten the monetary union.
Harris Dellas University of Bern	Strongly disagree	Very confident
John VanReenen London School of Economics	Agree	Not confident
Sweder van Wijn... Universiteit van Amsterdam	Strongly agree	Very confident	Yes we are waiting for mr Schauble to unleash a deficit financed public investment boom. Good for the Eurozone AND good for Germany with its infrastructure slowly approaching third world quality.
Michael Wickens Cardiff Business School & University of York	Agree	Extremely confident	I agree in one sense but Germany's current account balance is not the source of the problem. It is only a symptom. The main underlying problem is the single currency. 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. A connected issue is that the German private sector has been running a surplus of about 8 per cent of GDP for a long while. The Netherlands surplus has been around 13 per cent! Other eurozone countries are much closer to balance. This is also a contributory cause of the current account imbalances in the eurozone.
Gernot Müller Eberhard-Karls-Universität Tübingen	Disagree	Confident
Antonio Fatás INSEAD, Singapore	Strongly agree	Extremely confident
Fabrizio Coricelli University of Siena and Paris School of Economics	Strongly agree	Very confident	An aggravating problem is that, in contrast with the pre-crisis period, the increase of foreign investments corresponding to the huge German current account surplus is not going to sustain investment and consumption in the eurozone countries in difficulties (especially Southern Europe), as these countries have turned from large deficits to sizable surpluses in their current account.
Nicholas Oulton London School of Economics	Strongly agree	Very confident
Pierpaolo Benigno Università LUISS G. Carli	Strongly agree	Very confident
Fabio Canova BI Norwegian School of Management	Disagree	Confident	Surpluses are with the rest of the world, not so much with euro area members. However, since they come at the cost of other euro area countries loosing market shares in world markets (because of aggressive price policies of german companies), some redistribution of the gains seem reasonable.
Gino A. Gancia Queen Mary University of London	Neither agree nor disagree	Confident
Kevin Hjortshøj... NYU Abu Dhabi	Agree	Very confident	Germany's current account surpluses spill over to the whole world, not just the Eurozone but nonetheless they are a threat to the Eurozone economy -- or perhaps rather they reflect underlying problems which themselves pose a serious threat. Viewed macroeconomically, they reflect insufficient spending in an economy with fiscal space, at a time when there is a chronic lack of demand in the Eurozone and global economies. Viewed through the lens of exports minus imports, they reflect an undervalued currency which is exporting unemployment to neighbours such as France. If this continues indefinitely that has to pose a political threat to the survival of the Eurozone.
Jean Imbs Paris School of Economics	Strongly agree	Very confident
Wendy Carlin University College London	Agree	Confident	Germany's current account surpluses reflect deep-seated characteristics of the German political economy pre-dating the formation of the Eurozone. Germany - like a number of other northern European economies - has an export-oriented growth model. The commitment not to use fiscal policy or policies that boost the private housing sector to secure high employment (other than when faced with exceptional shocks as in the financial crisis) disciplines the large wage setters. The outcome is successful targeting of the real exchange rate, which can deliver high employment via external demand. It is these characteristics that make it highly problematic to have a common currency area comprising a group of countries able to target the real exchange rate and a group that cannot. The latter rely on domestic demand (private or public) to ensure high employment. This incompatibility is the root of the problem; current account surpluses are the manifestation.
Nicola Gennaioli Università Bocconi	Agree	Confident
Costas Milas University of Liverpool	Neither agree nor disagree	Confident
Francesco Caselli London School of Economics	Agree	Confident
Mario Forni Università di Modena	Strongly agree	Very confident
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE	Neither agree nor disagree	Very confident	I would not label them a "threat." Rather they may be viewed, together with Germany's strong fiscal position, as pointing to the existence of significant room to help offset insufficient aggregate demand in much of the euro area (due to weaker fiscal positions as well as the exhaustion of monetary policy ammunition). A euro-wide "policy coordinator" that cared equally about the well-being of all euro area citizens would call for a fiscal expansion in Germany. I may understand however that this is not necessarily in Germany's interest, so we shouldn't expect it under the current rules of the game (common monetary policy, decentralized fiscal policy).
Philippe Martin Sciences Po, Paris	Agree	Extremely confident
Sylvester Eijffinger CentER, Tilburg University	Strongly agree	Extremely confident	The German current account surpluses are indeed a threat to the Eurozone economy but German politicians will only agree with stimuluses when the Eurozone countries with deficits on the current account will pursue structural reforms in labour and product markets. Therefore, the Eurozone countries should improve their coordination of macroeconomic policies with stimuluses by the surplus countries, preferably investments in their infrastructure, and structural reforms by the deficit countries.
Ugo Panizza The Graduate Institute, Geneva (HEID)	Agree	Confident

Germany’s fiscal policy

Participant	Answer	Confidence level	Comment
Sir Charles Bean London School of Economics	Agree	Confident	I believe that there are very good grounds for a German fiscal expansion at the current juncture. The euro-area fiscal rules are asymmetric in forcing high-deficit countries to consolidate, but there is no countervailing pressure on the low-deficit/surplus countries in the other direction. As a result there is a deflationary bias in the area as a whole. In normal circumstances, the ECB would be able to offset that deflationary bias, but it is much harder at the present juncture where policy rates are at, or near, their lower bound. The one rub I would add is that the stimulus need not come entirely through extra public spending (though the state of German infrastructure would warrant that). It can also come through fiscal incentives and structural changes that encourage higher private consumption and investment.
Jonathan Portes KIng's College, London	Agree	Extremely confident	There is no economic or intellectual case for asymmetric adjustment. Countries with (current account and fiscal) surpluses need to adjust too. It's true fiscal policy alone may hae limited impact but it won't have zero impact and will still help. Moreover the refugee influx, in particular, is a cast-iron case for spending more on "investment" now (especially in language training and labour market integration) given the potentially huge longterm economic and social benefits (and the costs of failing to do so)
Jan Eeckhout University College London	Agree	Very confident
Gianluca Benigno London School of Economics	Neither agree nor disagree	Confident	It is not obvious to me that an increase in public spending will be reflected in a worsening of the surplus. This depends on how the other component of aggregate demand (consumption and investment) react to the fiscal expansion.
Ray Barrell Brunel University London	Strongly agree	Very confident	German fiscal policy should obviously be set in line with the objectives of the German polity. These objectives include having enough saving for old age and a desire to increase profits from exporting technology into plants abroad to serve foreign markets through Foreign Direct Investment. The former may require current account surpluses, but it is not clear the latter does. In addition maintaining the current set of compromises that keeps Europe at peace is also a clear objective of most German policy makers. The scale of German current account surpluses is putting that political compromise under pressure. The evidence suggests that a fiscal surplus in an economy at full employment will be largely reflected in a current account surplus, and a reduction in the fiscal surplus will reduce the surplus. A rise in German public investment, for instance, will reduce the surplus in two ways, firstly through demand and secondly through competitiveness. Although road building may have a limited import content, at the first round, the workers employed spend their incomes, and two fifths of that may be on imports. In addition the increased level of demand will raise real wages and prices. A lower current account surplus will be associated with a higher real exchange rate, and in EMU this can only be achieved by having German inflation higher than that in its partners for a period (but not permanently). A current account surplus reduction of one percent of GDP may require a two percent higher real exchange rate. This would mean German inflation would be one per cent higher than otherwise for two years, and the German government budget surplus would have to be one to two percent lower. A political compromise on this would make sense for the German people as well as for the rest of the Eurozone.
Nezih Guner CEMFI	Neither agree nor disagree	Confident	I think this will depend critically on the type of public spending. Public spending on investment incentives or infrastructure, for example, can further enhance the productivity advantage of German economy and can very well make the situation worst. The same might also be true for public spending that will enhance the flexibility of the labor market (such as child-related transfers). On the other hand, spending on housing or transfers to retired, cash or in-kind, might have a stronger effect on domestic demand and lower the savings rate.
Per Krusell Stockholm University	Disagree	Confident	See the arguments above.
Ricardo Reis London School of Economics	Agree	Confident	The European institutions regularly demand that countries with high fiscal deficits reduce spending because (i) that is in the Maastricht Treaty, and (ii) because thigh deficits come with increasing public debt, higher chances of a sovereign default, and enormous political pressure on the no-bailout clause of the Treaty as we saw a few years ago. The Treaties do not put the European institutions in charge of aggregate demand management. Therefore it makes perfect sense for there to be a pronounced asymmetry between requiring the reduction of fiscal deficits, but having nothing to say about fiscal surpluses. Now, given current conditions in the Eurozone, it seems likely that both Germany and the rest of the EA would benefit from some fiscal expansion in Germany (e.g., http://www.nber.org/chapters/c13784 and http://www.nber.org/chapters/c13786.pdf). Given the increase in the primary surplus since 2004, there also seems to be some room to do so.
Robert Kollmann Université Libre de Bruxelles	Strongly disagree	Very confident	I strongly disagree, because (as argued in my answer to the previous question), the German current account surpluses are a symptom, and not the cause of Eurozone problems. Higher German government purchases will not solve the deep structural problems in France, Italy and the periphery, or help European banks.
Philippe Bacchetta Université de Lausanne	Agree	Very confident
David Cobham Heriot Watt University	Agree	Confident
Mathias Thoenig DEEP-HEC, University of Lausanne	Agree	Confident
Elias Papaioannou London Business School	Agree	Confident
Francesco Giavazzi IGIER, Università Bocconi, Milano	Disagree	Confident	to qualify: I think they should expand fiscal policy but by cutting taxes, not by raising spending
Pietro Reichlin Università LUISS G. Carli	Agree	Confident	I agree that, given Germany's high national saving and the low interest rates in the Eurozone, a bust to Germany's public spending would benefit to some extent the rest of the member countries and alleviate some of the risks. However, it is not clear if this is in the interest of Germany, given the extremely low unemployment rate and the fact that the country economic activity is basically operating at full potential.
Claudio Michelacci EIEF	Strongly agree	Extremely confident
Fabien Postel-Vinay University College London	Agree	Not confident
Sean Holly Cambridge University	Agree	Confident
Wouter Den Haan London School of Economics	Agree	Confident	Germany's desire to save more at a time when other countries really needs to save more is costly for the latter. One could argue that this is simply a cost of being in a currency union. Or one could argue that being in a currency union comes with some responsibilities. I think the latter is correct. The tricky bit is, of course, whether one could design rules to implement this. But at this point, it would make sense for Germany to do some fiscal stimulus especially since it is hard to see substantial downside risk.
Andrew Mountford Royal Holloway	Neither agree nor disagree	Confident
Sir Christopher... London School of Economics	Strongly agree	Extremely confident	for the reasons that I explained in my answer to question 1. Increasing public spending in Germany is a way to helping the Eurozone with a boost in aggregate Eurozone demand
Jürgen von Hagen Universität Bonn	Disagree	Confident	"The German government" is undefined as we need to distinguish between federal and Lander. Lander public finances are mostly unsustainable and an increase in spending is not called for. Federal finances are sustainable. Federal spending could be increased to accommodate recent immigrants and to repair the country's infrastructure which is in bad shape.
Joseph Pearlman City University London	Agree	Confident
Etienne Wasmer Sciences Po, Paris	Neither agree nor disagree	Very confident
Stefan Gerlach EFG Bank	Agree	Confident	More public spending on specific public infrastructure projects that pass a careful cost-benefit analysis and contributes to economic growth would be desirable. If very large German surpluses -- which reflect a saving-investment imbalance and not competitiveness -- were continue indefinitely, they could indeed become a threat to the euro area.
Paolo Surico London Business School	Agree	Confident
Franck Portier University College London	Disagree	Confident
Lucio Sarno Cambridge University	Agree	Confident
Akos Valentinyi University of Manchester	Agree	Very confident
Panicos Demetriades University of Leicester	Neither agree nor disagree	Confident	I don't think public spending is the only way forward, Germany needs to find ways to increase private spending.
Silvana Tenreyro London School of Economics	Agree	Confident
Harry Huizinga CentER, Tilburg University	Agree	Confident
Simon Wren-Lewis University of Oxford	Strongly agree	Extremely confident
David Miles Imperial College	Neither agree nor disagree	Confident
Giuseppe Bertola Università di Torino	Strongly agree	Very confident	When the private sector's reluctance to spend threatens any economy with a bad equilibrium, governments should correct the coordination failure. Higher public spending and nontraded sector inflation in Germany would be good for all the eurozone, Germany included.
Mirko Wiederholt Science Po	Agree	Confident
Ethan Ilzetzki London School of Economics	Neither agree nor disagree	Not confident	There is a domestic reason why Germany might want to increase public spending, growth is at merely 0.1%. Our knowledge of the spillover effects of fiscal policy are still limited enough that I would be wary of advocating a fiscal stimulus for this purpose alone. Public spending is indeed largely on non-tradables, so that spillovers are likely to come from indirect forces. The most likely channel is through an appreciation of the German real exchange rate. And if the objective is a German revaluation, other policies are available and more direct. This include wage policy and tax policy.
John Hassler Institute for International Economic Studies (IIES), Stockholm University	Agree	Confident
Evi Pappa European University institute	Disagree	Confident	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.
Alan Sutherland University of St Andrews	Agree	Confident
Jonathan Temple University of Bristol	Agree	Not confident
Omer Moav University of Warwick	Disagree	Confident
Jim Malley University of Glasgow	Agree	Confident
Paul De Grauwe London School of Economics	Agree	Very confident
Francesco Lippi LUISS	Disagree	Confident	to me the idea is pointless, and if it worked might be bad for the germans who apparently want to save and not vice versa (and why should I tell them to do otherwise?). Moreoevrer, the policy might at best have second order effects by a Ricardian equivalence argument
Harris Dellas University of Bern	Strongly disagree	Very confident
John VanReenen London School of Economics	Strongly agree	Confident
Sweder van Wijn... Universiteit van Amsterdam	Strongly agree	Extremely confident	Yes, srong positive externality on the rest of the Eurozone and anyhow needed given Germany's crumbling infrastructure. Germany's (public capital)/GDP ratio is HALF of the comparable ratio in the Netherlands.
Michael Wickens Cardiff Business School & University of York	Disagree	Very confident	As explained in my answer to question 1, German public spending is not the problem. It is the single currency and large German and Dutch private sector financial surpluses.
Gernot Müller Eberhard-Karls-Universität Tübingen	Disagree	Confident	Evidence to date suggests that the link between fiscal policy and current account is weak. In fact, not even the sign of how a fiscal expansion impacts the current account is clear (see, Kim and Roubini's 2008 paper on twin divergence).
Antonio Fatás INSEAD, Singapore	Strongly agree	Extremely confident
Fabrizio Coricelli University of Siena and Paris School of Economics	Neither agree nor disagree	Confident	Low investments have been a major factor in the German current account surplus, as well as the sharp increase in corporate savings. A generic increase in public spending may not be very effective on these items. Furthermore, the potential appreciation of the euro could adversely affect external demand for all eurozone countries.
Nicholas Oulton London School of Economics	Strongly agree	Very confident	The same effect could of course be achieved by cutting taxes.
Pierpaolo Benigno Università LUISS G. Carli	Strongly agree	Extremely confident
Fabio Canova BI Norwegian School of Management	Neither agree nor disagree	Confident	Not clear that German public spending will drive euro area economies up - trade channel of fiscla policy transmisison is quite negligible. Spillovers were small in the past, it is hard to see how they will be become large now
Gino A. Gancia Queen Mary University of London	Agree	Not confident
Wendy Carlin University College London	Neither agree nor disagree	Confident	As phrased, the statement makes sense but it does not take account of the institutional basis of the functioning of the German economy as referred to in the previous comment. There are other policies that Germany could adopt that would promote domestic demand consistent with the underlying political economy and indirectly moderate the external imbalances in the Eurozone. The most important is to increase the incentives for women to participate in the labour force.
Kevin Hjortshøj... NYU Abu Dhabi	Strongly agree	Extremely confident	With insufficient private spending in the Eurozone, governments that are able to have to pick up the slack.
Jean Imbs Paris School of Economics	Strongly agree	Very confident
Nicola Gennaioli Università Bocconi	Agree	Confident
Costas Milas University of Liverpool	Agree	Not confident	Yes, but (of course) there is no mechanism to force Germany to do so. The EU Treaty talks about 'corrective' fiscal measures when the deficit exceeds 3% of a country's GDP. There is no similar mechanism in case of a (relatively) big fiscal surplus. This is unfortunate because the IMF expects Germany to be the only EU country which will retain a fiscal surplus by as much as 0.59% of GDP by...2021.
Francesco Caselli London School of Economics	Agree	Confident
Mario Forni Università di Modena	Strongly agree	Very confident
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE	Neither agree nor disagree	Very confident	I think it would likely help the rest of the euro area, but this doesn't necessarily imply they "should" do it.
Philippe Martin Sciences Po, Paris	Strongly agree	Very confident
Sylvester Eijffinger CentER, Tilburg University	Strongly agree	Extremely confident	The German government should increase public spending in terms of investment in the physical infrastructure (e.g. bridges, roads, railways, etc.) and in the human infrastructure (e.g. education, research, etc.). Other surplus countries, like the Netherlands, should also increase investments.
Ugo Panizza The Graduate Institute, Geneva (HEID)	Strongly agree	Very confident

How the experts responded

Global imbalances

Germany’s fiscal policy

About the CFM Surveys