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Neither stimulus nor austerity will work
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WHEN the US Treasury recently added its voice to the chorus of critics of Germany’s current-account surplus, it underscored the disagreement over what should be done about it.
The critics want Germany to increase its contribution to global demand by importing more and exporting less. The Germans view the maintenance of strong balance sheets as essential to their country’s stabilizing role in Europe.
Unfortunately, the debate has too often been informed more by ideology than facts. The difference between what a country exports and imports can reflect myriad factors, including business cycles, demographics, investment opportunities, and economic diversification. It can also reflect the government’s penchant for running fiscal surpluses.
During the first half of the 2000s, US policy-makers chose not to worry about sustained current-account deficits. They argued at first that the deficits merely reflected the world’s attraction to superior US investment opportunities, an odd position given that the US was not growing especially quickly.
Later, academic researchers identified more plausible reasons why the US might be able to run large deficits without great risk, as long as investors’ desire for diversification, safety, and liquidity sustained global demand for US assets.
But policy-makers should have recognized that even these better rationales had limits, and that massive sustained current-account deficits are often a blinking red signal of deeper problems.
In the case of Germany, we are talking about surpluses, not deficits. The European Commission has recently completed its own report on Germany’s surpluses, concluding that it is difficult to pin down the many factors underlying it. For example, Germany’s capital-goods exporters have benefited from growth in China.
Germany is right to point out that its strong balance sheet underpins Europe’s fragile stability today.
At the same time, it is also true that Germany could have been more liberal in using its balance sheet to defuse debt-overhang problems in periphery countries like Portugal and Greece, and perhaps even Ireland and Spain.
The bottom line is that large sustained external imbalances are something that global policy-makers do need to monitor closely. And critics of the surplus countries are right that there are two sides to every balance, and that policies in both surplus and deficit countries should be subject to review.
But it is wrong to believe that simplistic answers, such as more fiscal stimulus or more austerity, are a panacea; more often, the underlying problems relate to debt, structural rigidities, low investment, and weak competitiveness.
Kenneth Rogoff is professor of economics and public policy at Harvard University. Copyright: Project Syndicate 1995-2014. Shanghai Daily condensed the article.
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