In memory of Dr. Andreas Höfert

Bernanke's blame on Germany

| Posted by: Andreas Höfert | Tags: Andreas Höfert

Besides renewed fears of a Grexit or Graccident and increasing doubts about the strength of US economic growth after a dismal US labor market report for March, another interesting event took place during the Easter week: former Federal Reserve Chairman Ben Bernanke has started a blog (see:

His first three blog entries explored the causes of the low interest rate environment, which, according to Bernanke, is not the making of the Federal Reserve and its USD 4,500 billion QE programs. Instead, he says it could be traced back to the worldwide “savings glut,” a term he conceived in 2005. His claim instigated some controversies, with a critical response from Larry Summers, a former treasury secretary, which can also be found on Bernanke’s blog.

In his fourth blog entry called “Germany’s trade surplus is a problem,” he expands on his savings glut theory taking the huge German current account surplus as an example. When looking at global imbalances, we usually focus on deficit countries. However, since for each current account deficit, there must be matching surpluses, surplus countries can also be seen as problematic. So why not reverse the blame and make surplus countries the core of the imbalance problem?

Bernanke is not the first to use this line of argument. Blaming it on Japan or China for allegedly not playing fair and for manipulating their currencies has been a favorite mantra by US politicians complaining about the American current account deficit over the last few decades.

Even Germany has been criticized about its surplus; although with the euro, one cannot accuse it of manipulating its currency. Back in March 2010, Christine Lagarde, then the French finance minister, said Germany “should raise long stagnant domestic consumption, helping weaker Eurozone nations to boost exports and shore up their finances.” German politicians derided her comments as typical French dirigisme.

Bernanke is walking the same path: “Germany could help shorten the period of adjustment in the Eurozone and support economic recovery by taking steps to reduce its trade surplus, even as other euro-area countries continue to reduce their deficits.” This could be done by investing in infrastructure, raising the wages of German workers, or targeted tax incentives to boost private domestic investments, including new housing construction.

At first glance, this makes sense. But then again, it is more the kind of program you would expect from a French lawyer (Lagarde) than from a US mainstream economist (Bernanke). Increasing government spending through infrastructure investments or tax incentives, especially when the economy is already doing well, seems like overstretched Keynesianism, the kind usually propagated by Paul Krugman. Moreover, although Germany might be “best in class” among the G7 countries when it comes to debt-to-GDP ratios, it is only so because the rest of the class is really weak. Germany’s current debt-to-GDP ratio at 80% is 20 percentage points above what was once considered the threshold for admission into the Eurozone. And increasing wages for German workers is easier said than done. We shouldn’t forget that Germany, like the US, is a market economy, where wages are negotiated privately and not imposed by the government.

But what is missing is an answer to the question why Germany has such a large current account surplus in the first place. Current account balances reflect both the degree of competitiveness (exports minus imports) and the size of savings. Germany has such a current account surplus because it is very competitive (wage increases would obviously reduce this) but also because it saves a lot. This latter fact in turn is not only related to some cultural stereotypes but also to the fact that among developed economies, it has, after Japan, the worst demographics and hence tremendous unfunded government liabilities. Asking the German government to spend more, while the country faces the tremendous challenge of an aging population, seems ingenuous.