On German External Imbalances

CEPS Policy Insights, No 2018/13, November 2018

22 Pages Posted: 25 Oct 2019

See all articles by Stefano Micossi

Stefano Micossi

Associazione italiana delle società per azioni

Alexandra D'Onofrio

Luiss Guido Carli University - Arcelli Center for Monetary and Financial Studies (CASMEF)

Fabrizia Peirce

ASSONIME

Multiple version iconThere are 2 versions of this paper

Date Written: 2018

Abstract

This paper describes four features of the German economy which lie at the root of its external imbalances: the evolution of its real exchange rate; the underlying trends in productivity and unit labour costs; the persistent shortfall of investment relative to domestic savings; and the deployment of much of the current external surplus in portfolio investments outside the euro area.

The euro has helped Germany maintain a strong competitive position for its exports within the euro area and has helped moderate the appreciation of its exchange rate vis-à-vis the main third-country currencies.

Moreover, the currency union has eliminated much of the pressure on Germany to adjust its burgeoning external surplus, since capital inflows no longer affect its monetary base creation. The export strength of German manufacturing has been built, on one hand, upon a rate of growth in productivity in manufacturing, which even if declining has been almost constantly higher than that of its European partners; on the other hand, upon a remarkable measure of wage restraint. The analysis of sectoral balances between savings and investment shows that the enormous increase in Germany’s current external surplus in the euro years was determined by rising profits and low investment in the corporate sector, and by the shift of the public sector budget from deficit to surplus. Increased savings by the household sector do not contribute to the explanation of the surplus, contradicting the view whereby the surplus was the result of higher savings by an ageing population.

Finally, the analysis of the capital account of the balance of payments shows that Germany has contributed neither to real investments within the euro nor to sharing the risks implicit in an incomplete monetary union with divergent national fiscal policies.

Keywords: macroeconomic imbalances, crises, current external surplus

JEL Classification: E

Suggested Citation

Micossi, Stefano and D'Onofrio, Alexandra and Peirce, Fabrizia, On German External Imbalances (2018). CEPS Policy Insights, No 2018/13, November 2018 , Available at SSRN: https://ssrn.com/abstract=3471151 or http://dx.doi.org/10.2139/ssrn.3471151

Stefano Micossi (Contact Author)

Associazione italiana delle società per azioni ( email )

Piazza Venezia 11
ROMA, 00187
Italy
+39 06 69529214 (Phone)

Alexandra D'Onofrio

Luiss Guido Carli University - Arcelli Center for Monetary and Financial Studies (CASMEF) ( email )

Viale Romania 32
Rome, 00197
Italy

Fabrizia Peirce

ASSONIME

Piazza Venezia 11
ROMA, 00187
Italy

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