The US Treasury is too soft on Germany’s imbalances
Του Desmond Lachman
The US Treasury is to be complimented for adding Germany to a new list of countries to be monitored for possible currency manipulation. However, the Treasury has remained too meek in its policy recommendations by not calling for Germany to exit the euro.
The U.S. Treasury is to be complimented for now including Germany in its most recent currency report to Congress — along with China, Japan, Korea and Taiwan — on a new list of countries to be monitored by the Treasury for possible currency manipulation. However, it is to be regretted that the Treasury does not offer a real analysis of the underlying causes of the large German external current account surplus. More disturbing yet, the Treasury does not come up with real recommendations as to how Germany’s large external imbalance is to be corrected.
That Germany is running a disturbingly large external imbalance is hardly open to question. According to the most recent official balance of payments data, Germany’s external current account deficit rose to the highest level on record in March 2016. It is now on track to remain above 8 percent of gross domestic product (GDP) for the year as a whole, which would be more than twice China’s current account surplus.
Making this surplus all the more troubling is the fact that it is occurring at a time when the German economy is cyclically in a very much stronger position than its European partners. This cyclical strength would have argued for a weaker German surplus.
Surprisingly, the Treasury does not seem to view Germany’s persistently large external current account surplus as the result of an excess of that country’s domestic savings rate over its domestic investment rate. In particular, the Treasury does not draw attention to the fact that at around 26 percent of GDP, Germany’s domestic saving rate is some 10 percentage points higher than that in the United States and is significantly higher than that of its European partners. It also does not draw attention to the fact that this high overall saving rate is both a reflection of the combination of a very high household saving rate and a German government sector that is in broad budget balance.
More surprising perhaps is the fact that the Treasury does not emphasize that Germany has benefited in world export markets by tying itself to a weak euro while at the same time both improving its labor productivity and holding down its wage costs. This has consistently given Germany a cost advantage in global markets that has been a driving force for the country’s robust export sector.
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