It’s All Germany’s Fault

There is nothing that elicits more condemnation, now that the euro crisis appears to be receding, than Germany’s current account surplus. It has been blamed for the crisis-stricken countries’ deficits, for prolonging the crisis, for reflecting Germany’s unfair advantages and, not least, for being a burden on the entire globe. A chorus calls for Germany to “do something” to redress the balance. It should stimulate domestic consumption, raise its wages, undertake infrastructure investments and so on.

Hans-Werner Sinn has already explained what’s behind the surplus ("if Germans export capital, by definition goods will also flow abroad. This gives rise to a current account surplus." A thorough explanation in German is here), so we won’t go into that. For the sake of discussion, let’s see what the calls to “do something” to shore up domestic consumption would entail. Three areas would come into question: raising wages and lowering taxes, increasing investment, and revamping regulation.

First off, regarding wages, Germany is not France, a highly centralised country where around 56 percent of the economy is in state hands. There, raising state employees’ salaries would have an immediate effect on the entire economy. Germany, in contrast, is a federal country. As such, many of its public employees are actually in the Länder (federal state) payroll. And unfortunately, not all German Länder are on an equal financial footing. Of the 16 Länder, only three – Bavaria, Baden-Württemberg and Hessen – are not in the red. All the other ones, in particular Berlin and Bremen, would scream murder if they were to be told to raise their employees’ salaries, since they simply could not afford it. And the three in surplus would equally scream murder if they had to increase their contributions to the fiscal equalisation fund that props up the rest. As it is, two states have already filed an official complaint aimed at reducing their transfers.

So, raising public employees’ salaries to goad the private sector into following suit seems unfeasible. But given that Germany is allegedly a too-low-wage place, how about imposing an across-the-board minimum wage? Leaving aside the many studies that show this to be usually detrimental to overall welfare (see for instance here and here), Germany is already doing that. A new minimum of 8.5 euros per hour is to be rolled out. Small employers are already fretting that production and jobs will wander eastward, so the overall effect remains to be seen.

Something akin to lowering taxes seems more plausible: Germany could, and should, simplify its tax code, closing loopholes and reducing some rates. Alas, the idea has been proposed several times, last by the Liberals in the previous government coalition, but has so far got nowhere. Still, that is no reason for not giving it another try.

Then, how about increasing infrastructure investment? Let’s forget for a while that Germans are amongst the most averse to infrastructure projects of any sort, anywhere. Everyone wants green energy, but by Jove no wind turbines here, no new power transmission lines, no geothermal boreholes. Good Autobahns? Of course, but please over that hill, not here. A new runway for an airport? God forbid. Cheap energy? Yes, but no nuclear, no fracking, and by all means no dams. Trying to sell an infrastructure project to a German is like selling fridges to Eskimos. We, they sniff, don’t need that right here.

But we said, let’s forget that quirk for a while. The thing to be sorted out then would be funding. But Germany, despite its purring economy, is no Apple Inc. with a bulging cash pile looking for good investment opportunities. Any infrastructure investment would have to be financed with borrowed money. Or by raising taxes. But that is exactly what Germany is being asked not to do: it should instead lower taxes to leave more money in people’s pockets to stimulate consumption. And Germany is trying to repay its debts, not accumulate more. It has even enshrined debt brakes in its constitution.

So there appear to be some obstacles to increasing infrastructure spending after all.

What about loosening up some regulations? Liberalising something, after all, often appears to be associated with some beneficial outcomes. So let’s see what could be liberalised in Germany.

One thing could be to stop meddling with shopping hours. Why should laws dictate when shops can open and when people can shop? Liberalising that area might contribute to luring Germans to open their purse more frequently. Germany should also drop the many anachronistic restrictions that limit the customers’ options while padding the pockets of those benefitting from them, such as the fact that no one may own more than one pharmacy and at most three subsidiaries, all of which must be located in the same district or in neighbouring ones. And the owner may only be a pharmacist. So, no pharmacy chains here. This makes sure that, say, Aspirins are far more expensive in Germany than nearly anywhere else.

Many crafts in Germany may only be practiced by someone possessing a “Meisterbrief”, a master craftsman certificate, and any business in the trade has to be run by a Meister. Liberalising entry into this market would surely lower prices and increase business, you might think. But resistance would be enormous, and not necessarily only from the Meister and her employees. Germans feel reassured by the Meister having such certificates, which they see as a guarantee of high quality of service. Doing away with them would be, in the German view, akin to waiving the requirement of publications for university professors, a degree in medicine for physicians or a master in education for teachers. What a patently absurd idea. So, the cultural barrier to be surmounted is huge.

And, talking about cultural barriers, consider the difficulties of prompting Germans to spend with more abandon. While the GfK Consumption Index is at its highest level since before the Lehman collapse, signalling a merry spending mood among the populace, don’t rejoice just yet: Germans are a cautious lot. They still prefer to pay cash – Germany has the lowest usage of credit cards in the developed world – and ideally pay in full. They are loath to go into debt, which may explain the astoundingly low level of home ownership, compared to, say, the UK, Italy or Spain. Where they do splurge is on holidays, but that may not necessarily help the cash-strapped countries in southern Europe’s sunnier climes. There is always Thailand, after all.

So how about encouraging them to dig into their savings and indulge themselves a bit? Well, they retort, rightly or wrongly, someone, namely the ECB and the government, is already digging into their savings, sending them abroad for others to spend.

The upshot? It all looks easier from the outside. From here, with ingrained attitudes, cultural mores, political realities and debt brakes to surmount, raising consumption by decree seems quite a tall order.