Responding to a piece by Ryan Avent, the noted (and mysterious) German blogger Kantoos asks for help in coming up with ideas about how to reduce Germany’s current account surplus, apart from deregulating services.
Let me help him (or her). Germany could go some way to reversing the labour market reforms and the political pressure on the collective wage bargaining system that in the 2000s systematically both squeezed domestic demand and raised Germany ‘s price competitiveness, and were thus instrumental in the massive widening of the current account surplus. They also led to Germany recording one of the largest increases in inequality of all the OECD countries since the 1990s. Alongside policy reversals it could also introduce a statutory minimum wage: indeed even the CDU is now considering this.
I agree with Kantoos that the situation is changing and that Germany’s import absorption will increase. Yes, more fundamental mechanisms were behind the faster nominal wage and price increases in the euro area periphery and their mirror image in Germany before the crisis. But public policy – such as the Hartz reforms, the deregulation of non-standard forms of employment – played a role and such policies were very much predicated on a belief that reducing unemployment can only come through improved competitiveness. To that extent I don’t think it is strictly wrong, when Kantoos writes
What Germans (and hence their politicians) do care about is growth and unemployment. If the former is high, and the latter is low, nobody cares about the current account surplus.
but it is misleading. Most German policymakers fervently believe that growth and employment come and can only come from increasing exports. Finance minister Schaeuble famously compared reducing net exports to a situation where Bayern Munich deliberately played less skilful football so that it would lose to Olympique Marseille. Morover, the bare facts of pre-crisis Germany seemed to bear that out: domestic demand was stagnant and virtually all the (meagre) growth that was achieved came through higher net exports.
The only slight problem was that this was not a sustainable strategy for the largest single economy in the monetary union (and much less one that can be generalised to the whole euro area).
Kantoos is an astute observer of Germany and the euro area. But while I agree with much of this blog post, I am surprised that he (or she) appears to fall for the official discourse which is that competitive rebalancing must come from radical attacks on labour market and wage-setting institutions in deficit countries, while in surplus countries, well, we are not sure but liberalising shop opening hours would clearly be a good thing.