Christine Lagarde On Germany’s Balance Of Payments

Yesterday, there was a joint conference, Germany – Current Economic Policy Debates, jointly organized by the German Bundesbank and the IMF.

Christine Lagarde wrote an articleThree German Economic Challenges with European Effect at IMFBlog.

In that discusses Germany’s 🇩🇪 current account balance of payments:

Challenge 3: More balanced savings and investments

Another feature of the German economic recovery is the country’s high current account surplus. At nearly 8 percent of GDP, it is also the highest in the world in dollar terms. The high surplus shows that German households and companies still prefer to save rather than invest.

For our part, the IMF has indicated that this surplus is too large—even considering the need to save for retirement in an aging society. Boosting investment in the German economy and reducing the need to save for retirement by encouraging older workers to remain in the labor force can lower the surplus. We need to ask why German households and companies save so much and invest so little, and what policies can resolve this tension.

It’s welcome but still far from any action.

I also have a dislike for this kind of narrative. Usually the phrase saving is used in such discussion because of the identity:

National Saving = National Investment + CAB

where, CAB is the current account balance.

But the saving here is not the same as household saving and/or firms’ saving. Also it needn’t be the case that firms’ investment is low. It’s very well possible that households’ and firms may be saving low and yet the current account balance is high. This is because it depends on other things such as fiscal policy, competitiveness of German firms etc. The same argument is repeated in the other direction when the discussion is about the United States, with the claim that households save too little. But if US households start saving more, the US current account deficit will fall but that will be because of a fall in output and employment.

It’s important to remember that John Maynard Keynes recognized that active policy measures are needed to resolve global imbalances. He proposed to impose penalties on creditor nations in his plan for Bretton-Woods and also require them to take measures such as:

(a) Measures for the expansion of domestic credit and domestic demand.
(b) The appreciation of its local currency in terms of bancor, or, alternatively, the
encouragement of an increase in money rates of earnings;
(c) The reduction of tariffs and other discouragements against imports.
(d) International development loans

– page 24 of The Keynes Plan

Of course Bancor is not the solution but we can still learn from Keynes’ idea for creating policies for balance of payments targets, instead of relying on the market mechanism to resolve imbalances.

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