Stop trading insults

Bobbing around the river Elbe in a barge is probably the best way to get a sense of the huge scale of Hamburg’s port (Hafen Hamburg). It is hard to avoid using superlatives to describe the sights: massive cranes, huge numbers of containers, enormous dry docks and gigantic ships. There are also cruise liners, ferries and even an old Russian submarine. Close by is the Kiez red light and entertainment district, centred on the Reeperbahn, which is designed to service different kinds of needs for visitors.

The port’s vital statistics are also impressive. According to the Hamburg Port Authority it has a surface area of 72 square kilometres, its own 140km road network, 304km of railway track and over 130 bridges. Every year about 10,000 ships use the port and the total cargo handled in 2014 was 145.7m tons .

The port area of Germany’s second largest city is of course an expression of economy’s formidable trading power. Although its GDP is substantially smaller than that of the world’s global giants (America, China and Japan) its current account surplus is easily the largest in the world. In other words it exports more than it imports by a significant margin. Its output of machinery, vehicles, chemicals and household equipment are an expression of the economy’s industrial competitiveness

A large current account surplus is associated with high levels of savings. In effect the Germans bank a high proportion of the proceeds of their strong exports. From a German perspective its export performance is a sign of competiveness and the high savings rate is an indication of national prudence. It follows from these assumptions that countries such as America and Britain, with their yawning deficits and low savings, are irresponsibly living beyond their means.

Germany’s critics, particularly those of a Keynesian persuasion, see it rather differently. In their view the problem is not deficit countries consuming too much but Germans consuming too little. Germany’s large current account surplus and substantial savings amount to stealing demand from the rest of the world. If Germany would only buy more foreign goods, so the critics argue, the global economy would achieve a better balance. Since China’s surplus has decreased substantially in recent years the Germans face the brunt of such attacks.

Both sides in the debate, with their shared emphasis on consumption, are one-sided. It is telling that it would be possible to use the same evidence to draw conclusions opposite to those of the Keynesians. If America and Britain, for instance, made themselves more competitive their deficits would presumably narrow. Through this alternative route the world economy could theoretically also move closer to equilibrium.

The fundamental flaw in the debate is that both sides downplay the importance of production. A far better starting point would be to examine the productive weaknesses of the main western economies. For over three decades now the main western economies, including Germany, have all suffered from insufficient investment and economic atrophy.

Rather than trading criticisms it would be far better if each country focused on addressing its own economic shortcomings.

A slightly edited version of this piece was published on Fundweb on Friday.