Within two or three months, US president Donald Trump and the new president of France will both be confronted with an important question of economic diplomacy: what to do about the German current account surplus? Last year it reached 8.6 per cent of gross domestic product, an extreme number for the world's fourth-largest economy.
The surplus will probably fall a little this year and next, but its size and persistence constitutes one of the biggest sources of imbalance in the global economy, and within the euro zone.
If outsiders decide to confront the issue, they will need to do so intelligently. So far, Germany has brushed off all criticism. The European Commission presents reports on macroeconomic imbalances each year. The dustbins of Berlin are filled with them. Successive French presidents chose not to raise the issue either. Their priority during the euro zone crisis was to keep their heads down and avoid appearing on the radar screens of the bond vigilantes. As long as they could fund their sovereign borrowing, all was good.
The imbalances in the global economy, and Germany’s in particular, are not driven by trade. Germany is not subsidising its exports or manipulating its currency. The problem is an excess of savings over investments. This is due to bad policies and an ageing population.
Trade sanctions cannot fix a savings imbalance. My guess is that Germany would respond to punitive tariffs by trying to lower production costs further, which would make the problem worse.
Instead, the world should make Germany tackle the causes of the savings surpluses: over-regulated service industries; low growth levels of public and private sector investment; and damaging and unnecessary fiscal surpluses.
Contradictions
A good starting point would be to exploit the internal contradictions of Germany's defence of the surpluses. Ahead of last week's spring meetings of the International Monetary Fund and the World Bank in Washington, the Berlin government produced a paper that made the point that the US should not worry about its bilateral relationship with Germany, but with the euro zone.
The private paper argued that Germany cannot logically be a currency manipulator as it no longer has its own currency. If the euro is undervalued, it is not Germany’s fault, but a consequence of the European Central Bank’s monetary policies. The message seems to be: don’t call us, call Brussels or Frankfurt.
This is an extraordinary defence. If Germany blames the euro zone, then surely the US and the other members of the single currency should insist that the bloc be given the powers to address the problem more effectively.
Last year, the euro zone had a current account surplus of 3.4 per cent of gross domestic product, lower than Germany’s in relative terms, but still extremely large for the world’s second-largest economy. It means that the euro zone will have to acquire at the very least a joint fiscal capacity and the right to impose policies on member states to influence the relationship between savings and investments.
Since the German government rejects those policies, Berlin’s euro zone argument is bogus. The other member states should not allow Germany to point the finger at them because it runs massive imbalances with them as well as the rest of the world.
Pressure
So what should they do? What I do know is that the French political class would set itself up for failure if it did not put pressure on Germany to address the issue.
If Germany either accepts policies to correct the imbalances, or agrees to reforms of euro zone governance, or ideally both, then the most intelligent French strategy would be to seek a close partnership with Berlin and forge the next stages of European integration. That would be my preferred scenario. The euro’s survival necessitates such a step.
If Germany continues to refuse to address the issue, it would be the job of the next French president to convey to Angela Merkel or her successor as German chancellor that the euro zone is not a tenable construction, and that the euro will over time lose the support of the public, in France in particular.
There is no guarantee that Germany would be impressed by such a threat. But a euro zone break-up would constitute such an economic disaster for Germany that it would be in the country’s interest to tweak policy, rather than risk another crisis with potentially disastrous consequences.
Only France is in a position to force the issue because it holds the key to the future of the euro. Thus the smartest strategy for the US should be to forge a strategic alliance with France to confront Germany, rather than opt for unilateral trade sanctions, which are, at best, a diversion. – Copyright The Financial Times Limited 2017
