Martin Wolf is at it again in the FT this week, scolding Germany for running a current account surplus and for their criticism of the ECB. In the Keynesian utopia occupied by Mr. Wolf, the alchemists in the ECB are conjuring up growth from the printing press and German criticism is making their job harder – though with the refi rate at 0.0% and QE in full swing, it is hard to make the case that the Germans have been very successful in their mission to restrain Mario Draghi and his gang of counterfeiters. The ECB balance sheet is already north of EUR 3 trillion. Where would he want to be if those reactionary Germans didn’t try to spoil the party?
Mr. Wolf’s other grievance is Germanys persistent current account surplus, which has been running since the so-called Hartz labour market reforms in 2002 lowered labour costs and made Germany more competitive. Basically too competitive, shame on them. Germany just recorded their largest monthly surplus ever, EUR 30.4bn in March.
The IMF joins Mr. Wolf in a call for Germany to do something about it. EU rules actually limits a country to a surplus of 6% and Germany is in line to come in significantly above this year. Something must be done! In Mr. Wolf’s world, it is the savers fault that the debtor is in debt. A German current account surplus means that someone else is in deficit: ‘the prudent depend on the imprudent’ as he has previously put it. The remedy is of course more government spending, funded by more debt, to make up the shortfall and bring the current account back to zero. A country cannot produce more than it consumes forever, seems to be the thinking, but apparently the other way around represents no problem for a government, as long as they can borrow the money. Infrastructure projects is what the IMF suggests. This is of course nonsense. Only in a Keynesian world is forcing Germany to start spending frivolously going to help anyone. Now we are not suggesting to know that Germany doesn’t need spending on infrastructure, but we just don’t think a Washington bureaucrat knows where in Germany to put resources to work either. Only the market can allocate resources in accordance with demand. And since the state can only spend resources it takes away from productive parts of the economy, it may be better to just hold off…
The IMF and Mr. Wolf are barking up the wrong tree. It is not Germany’s responsibility to make other economies more competitive. By producing cheap, quality goods, Germany is helping making us all better off. Germany has shown the way forward. It is up to other countries to implement the dreaded structural reforms that Germany did more than a decade ago. Then things will balance out, without need for wasteful government spending. Anyway, Germany is spending. Say’s Law reminds us that production creates its own demand. Every Euro spent on a German product will be spent by the recipient – either as consumption or as investment. Germany is not spending too little, but making an intertemporal choice between spending on consumption now or investing for later.
Of course this is all in stark contrast to the UK, where running a trade deficit has become as entrenched as surpluses have in Germany. Are we to somehow blame Germany for producing too good cars? Or at least for having the audacity to save and not spend the proceeds on some of our inferior products?
As an afterthought it is worth noting that under a classic gold standard, running persistent trade balance surpluses or deficits is not feasible. Running a trade deficit leads to gold outflow as foreigners redeem currency for gold and therefore to a reduced money supply, resulting in lower domestic prices and improved terms of trade, which will reduce and eventually reversse the trade deficit. This is David Hume’s price-specie flow. Maybe that’s your solution, Mr. Wolf?