Saturday, August 27, 2016

German fiscal surplus

Brad Setser - Germany's going to run a fiscal surplus this year. Quote:

It turns out Germany has fiscal space even by German standards!

Germany’s federal government posted a 1.2 percent of GDP fiscal surplus in the first half of 2016. The IMF was forecasting a federal surplus of 0.3 percent (and a general government deficit of 0.1 percent of GDP—see table 2, p. 41); the Germans over-performed.*

Germany’s ongoing fiscal surplus contributes to Germany’s massive current account surplus, and the large and growing external surplus of the eurozone (the eurozone’s surplus reached €350 billion in the last four quarters of data, which now includes q2). The external surplus effectively exports Europe’s demand shortfall to the rest of the world, and puts downward pressure on global interest rates. Cue my usual links to papers warning about the risk of exporting secular stagnation.

Martin Sandbu of the Financial Times puts it well.

“The government’s surplus adds to the larger private sector surplus which means the nation as a whole consumes much less than it produces, sending the excess abroad in return for increasing financial claims on the rest of the world. German policymakers like to say that the country’s enormous trade surplus is a result of economic fundamentals, not policy—but as far as the budget goes, that claim is untenable. Even if much of the external surplus were beyond the ability of policy to influence, that would be a case to use the government budget to counteract it, not reinforce it.”

The Germans tend to see it differently. Rather than viewing budget surpluses as a beggar-thy-neighbor restraint on demand, they believe their fiscal prudence sets a good example for their neighbors.

But its neighbors need German demand for their goods and services far more than they need Germany to set an example of fiscal prudence. It is clear—given the risk of a debt-deflation trap in Germany’s eurozone partners—that successful adjustment in the eurozone can only come if German prices and wages rise faster than prices and wages in the rest of the eurozone. The alternative mechanism of adjustment — falling wages and prices in the rest of the eurozone — won’t work.

As an aside, doesn't the Eurozone periphery then provide an example of Keynesian stickiness? I.e., are they proving that it's unrealistic to think that prices can "adjust downward"?

Anyway, the Krugginator weighs in:

Krugman - Germany's drag. Quote:

I want to follow up a bit on Brad Setser’s post about the German fiscal surplus.

Here’s my point: at the moment, what we’re seeing in elite circles is a very belated but still welcome realization that monetary policy badly needs an assist from fiscal expansion. If structuring this one-two as helicopter money makes people feel better, fine; but the combined fiscal-monetary push is what matters.

But there are a couple of huge obstacles to carrying this project out. One is the US Republican Party, which is already getting ready to pursue scorched-earth obstruction to a Clinton presidency. But the other is the German problem: Germany’s obsession with fiscal probity, grounded in the fact that when it comes to macroeconomics Germany lives in a different intellectual universe from anyone else. And circumstances have given that German obsession much greater impact than bad ideas usually have.

Think about the nature of Europe’s problem. It’s actually twofold, or maybe two-and-a-half fold.

First, the euro area in aggregate suffers from at least the early stages of secular stagnation, which it’s entering with an inflation rate that is half the ECB target and even further below where the target should be. Breaking out of this lowflation problem really needs a fiscal boost.

Second, relative prices and labor costs are still misaligned within Europe, with southern Europe still needing internal devaluation that would be much easier if Germany were booming and experiencing higher inflation.

Second and a half, still a banking problem that surely requires further injections of public funds.

But Germany wants to run surpluses and wants everyone else to run surpluses. Germany’s tight fiscal policy directly contributes to weakness of overall European demand, and its deficit hawkery is an important reason why other European countries that have low borrowing costs are still pursuing austerity.

On top of that, German fiscal tightness means that the boom-and-inflation that should be helping internal devaluation in the south — which would, by the way, be the counterpart of the boom-and-inflation in the south from 2000 to 2007, which brought Germany out of its late-90s doldrums — isn’t happening. And this forces continued austerity in southern Europe.

Finally, as I understand it, it’s basically Germany demanding bail-in of private creditors on bank rescues, largely to block further government borrowing, which is sometimes a good idea but right now is perpetuating the simmering banking crisis.

So Germany’s fiscal obsession has a sort of multiplier effect on Europe, and indirectly on the world, that is disproportionate even to Germany’s economic size. And this makes me wonder whether all the sea-change in elite opinion that we’ve seen will do much good, since the government that most needs to change its policies isn’t listening.

Krugman seems to be suggesting that secular stagnation is a political creation, not some endogenous characteristic of modern economies.

I don't disagree, I just think it's neat that he's saying something.

No comments:

Post a Comment