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FACTORS BEHIND THE GERMAN CURRENT ACCOUNT SURPLUS AND ITS CONSEQUENCES FOR THE EUROZONE AND THE REST OF THE WORLD

M. Kakol

Abstract

For many years, Germany has been distinguished by a large surplus on the current account which has now reached almost 8% of the country's GDP. Since 2016, this surplus is the largest in the world and contributes to longstanding global trade and investment asymmetries as well as serious macroeconomic imbalances within the euro area. The main purpose of this study is to analyse the state of Germany's current account in 2000-2017 in order to identify and systemize the most important factors affecting the current account balance divided into three groups: 1) factors related to the specific features of the German economy and dependent on national economic policy, 2) factors resulting from the country's participation in Economic and Monetary Union, and 3) global factors. Other goals include: the presentation of economic effects of a positive balance on Germany's current account for their own economy, other euro area countries and selected countries with the largest share in the global imbalances, especially the United States, as well as the assessment of possibilities of reducing the surplus on the current account of Germany and leveling macroeconomic imbalances on the regional and global scale as a result of actions taken by Germany and deficit countries. The research methods used in this paper include a review of scientific literature concerning the topic and an analysis of selected economic indicators and statistical data presented by Eurostat, International Monetary Fund, the World Bank and The Conference Board. The analysis conducted in the paper reveals that among the most important factors influencing the size of Germany's current account surplus are: high competitiveness of German goods due to their quality and degree of specialization; relatively large propensity to save in Germany and low domestic demand resulting in high savings exceeding investment; rather low domestic return on investment compared to abroad; years of wage restraint and government social policy offering benefits that offset depressed wages as well as country's use of the euro contributing to undervalued Germany's inflation-adjusted exchange rate. The biggest cost for Germany of the current account surplus is primarily lower domestic investment while the country supplies the rest of the world with capital contributing to low global interest rates and facilitating investment in other economies. However, the Eurozone deficit countries seem to pay the highest price for German current account surplus as it depresses demand for their exports within the regional bloc and as a result raises unemployment and their public debt. From a global perspective, the most important consequences of imbalances in international trade are accumulation of external indebtedness and growing protectionism where the United States is the leader. The most effective and fastest way to reduce Germany's current account surplus and at least lower regional imbalances would be to increase government spending on infrastructure and education as well as to create incentives to encourage private investment in this country.

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