The global imbalances blame game

This article first appeared in this week’s Fund Strategy magazine.

Germany has, for the time being at least, replaced China as America’s lead villain in the world economy. The discussion of global economic imbalances is back but the main bogeyman this time around is European rather than Asian.

America turned the heat up on Germany a notch in the latest edition of the Treasury’s twice-yearly Report on Congress on International Economic and Exchange Rate Policies. Until recently the publication had become a vehicle for criticising China for its allegedly undervalued currency.

The latest report criticised Germany in the context of the ongoing weakness of the eurozone noting that it: “has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China.”

In strong language for an official document it went on to argue that: “Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy.”

In other words the Treasury department argued that Germany’s excessive exports should take much of the blame for the sluggishness of the global economy.

Not that the US Treasury is alone in criticising Germany’s large current account surplus. David Lipton, a senior official at the International Monetary Fund (IMF), gave a speech in Berlin shortly after the Treasury report was published in which he urged the German government to reduce its trade balance to an “appropriate rate”. This followed the publication of an IMF report in September that revisited the question of global economic balances.

The European Commission too has suggested that Germany’s current account surplus could be too large. In a memo published on November 13 it noted that the German current account surplus has exceeded 6% of GDP – the threshold at which the EC considers it a problem – every year since 2007. The EC has also recently forecast that it will stay above that level in 2014 and 2015.

Such criticisms are widely rejected inside Germany. The German public – already outraged by news that the US intelligence services had tapped the chancellor’s phone – reacted with incredulity to the US’s apparent claim that Germany is exporting too much. From a German perspective their country is being criticised simply for being successful and prudent.

The German economics ministry responded to the US Treasury report with a statement saying Germany’s surplus was: “a sign of the competitiveness of the German economy and global demand for quality products from Germany”. It also argued that domestic demand is a key driver of growth in Germany and that, unlike many other developed countries at present, incomes are rising.

In truth both sides in the argument are blinkered. Understanding the world economy through the prism of imbalances tends to lead to a fruitless blame game.

This approach to economics starts from a simple premise: on a global level the world economy must be in balance. For example, global exports must equal global imports – at least until trade with outer space becomes a reality! Therefore if one economy has a large trade surplus there must be corresponding trade deficits elsewhere.

From this perspective it becomes easy for countries with large deficits, such as America and Britain, to blame those with large surpluses, particularly Germany and China, for the world’s economic woes. From an Anglo-American viewpoint the Germans and Chinese need to consume more to bring the world economy into balance.

But Germany and China retort with some justification that they are in essence being criticised for being too competitive. The key problem, they argue, is the lack of dynamism in America, Britain and other deficit countries.

Both sides of the argument are, in essence, putting too much emphasis on the imbalances between them and paying too little attention to their own structural weaknesses. In Germany, for instance, levels of corporate investment are languishing at about the same low level as those of America and Britain.

It is also wrong to blame the eurozone’s weaknesses on Germany’s large current account surplus. This imbalance is more a symptom than a cause of the inherent tensions in the grouping. Tying together countries with fundamentally different economies into a single monetary bloc was always a recipe for trouble.

Meanwhile, America and Britain have no shortage of home grown economic challenges to tackle. For example, it would be far better if they focused on how to increase production in their own countries than whining about German and Chinese underconsumption.

Governments should resist the temptation to scapegoat others and instead shine the spotlight on their own economic weaknesses. It is also a great pity that so many economic commentators go along with their own governments in highlighting the weaknesses of other countries.

The only way out of the impasse is to stop discussing the world economy in terms of global imbalances. Playing blame the foreigner is a dangerous diversion.