German macro

More Notes On Germany  by Krugman

A few more things to say about Germany’s trade surplus and the US report saying, correctly, that it’s harmful to the world economy.

The worst thing, if you ask me, in the Spiegel report on the controversy is the statement by Germany’s Economics Ministry that Germany’s surplus is

a sign of the competitiveness of the German economy and global demand for quality products from Germany.

Economists everywhere should read this and weep. It is a basic accounting identity that

Current account = Savings – Investment

Any story about the determination of the current account balance must take this identity into account. Suppose you have wonderful products that the world loves; even so, if you have low savings and high investment, you must run deficits. How can this happen? Simple: you end up with a high value of your currency and/or high wages relative to competitors.

So while it’s impressive that Germany can run a surplus despite quite high labor costs, and that’s a testimony to the quality of its stuff, ultimately the surplus reflects high savings relative to investment.

And we are, as I said in a different context just the other day, in a world awash in savings, a world in which someone who decides to spend less and save more makes the whole world poorer. That’s not the normal situation, but it’s where we are now, and where we have been for five years.

Does the German Economics Ministry really not understand any of this? My guess is that it doesn’t — that Germany really does see itself as a role model, believes that all would be well if everyone behaved the same, and doesn’t see the notion of a world in which everyone runs big trade surpluses as being problematic in the least.