It’s not just Trump: the US has always been the most insistent among large economies that its current account deficits are the fault of other large economies that either deliberately run external surplus or stubbornly refuse to “correct” them. The Trump administration’s obsession with not just the overall deficit but each sectoral and bilateral deficit is the extreme aberration of a pre-existing concern: the belief that surplus economies’ governments can and should act to reduce their surpluses, and that failing to do so harms the deficit countries.
The same debate plays out inside Europe. Reforms during the financial crisis gave the European Commission the task of monitoring macroeconomic asymmetries between EU countries. Brussels hardly ascends to Trumpian heights of stridency, so its examinations have been timid. But Germany’s feathers have been ruffled by the mere suggestion that its enormous export surplus may be in any way improper.
The German Council of Economic Experts, an official advisory body, addresses the criticism head on in its latest forecast update. It also namechecks and rejects the criticism levelled at Germany by Peter Navarro, a White House trade adviser (the council report calls the criticism “completely misguided”). It is a short (go to Box 2) and instructive read, both for its refutation of the obsession about surpluses and for the chinks in its own argument.
The report makes a number of claims.
First, it suggests that policy cannot directly affect the net external balance of an economy. That is not true - while it is correct that the balance is determined by millions of uncoordinated decisions in a market economy, the government can clearly influence them. The question is whether it should and how.
Second, it estimates that much of the German surplus is a normal effect of structural causes, estimating significant contributions from the fall in oil prices, an ageing population and private sector debt reduction. These are important factors justifying national savings - to some extent. The last is the least convincing: if the German government does not want to borrow, should it not change tax systems and other structural policies to encourage more spending by the private sector?
Third, it argues that since the German economy is at full employment, it does not make sense to boost aggregate demand through looser fiscal policy. This is its strongest argument. But it does not justify no policy action. Even if total demand in the economy is close to what the economy can supply, policymakers should also consider the composition of that demand. Above all, they should try to stimulate more investment. As labour and capital shift into physical investment activities and thus produce fewer goods and services for consumption, it is likely that the private sector will respond by importing more to fill the gap.
Finally, there is an interesting discussion of bilateral trade balances. The German expert council points out that Germany’s trade surplus with most eurozone countries has fallen significantly since the crisis (except for France, where it has kept steady but stopped rising). This is an observation Free Lunch has also made in the past.
It has also triggered a mini-debate. The retort is made that bilateral deficits “don’t matter”, a point also made by us and by Martin Wolf recently. But they don’t matter in the particular sense that you can’t address an overall macroeconomic problem by looking piecemeal at bilateral balances.
In a different sense, they may be thought to matter. Those who criticise surplus economies for “stealing other countries’ demand” (or “exporting deflation/unemployment”) must surely also admit that whose demand you steal is indicated by whom you have bilateral surpluses with.
And if so, surely those critics - in Europe especially - should welcome the fall in Germany’s bilateral surpluses with other eurozone countries. And the retort that the rebalancing is caused by recessions in the eurozone periphery, while no doubt true, is misdirected. If a rising surplus (not a high level, but an upward change) reduces demand, then surely a falling surplus cushions a drop in domestic demand in the trading partner. So there is much to mull here. Many of the arguments successfully refute the critics. But the case that German policy should not be changed in response to the surplus is far from proven.
We finish with a delightful little sidekick across the Atlantic. The experts point out that the US external deficit has lasted for decades, whereas the eurozone has tended to be in external balance except for the past few years. The German experts write, rightly at least in part, that this “permanent borrowing from other countries is an expression of the United States’ ‘exorbitant privilege’ due to the US dollar’s role as a reserve currency”. The need to run deficits if you want to supply the world’s reserve currency, well understood in economic theory, is something Donald Trump’s economic advisers ought to impress on the president.