A sideways look at economics
This author happens to be German and an economist. There are some perks associated with being German. For example, the summer months of every second year, when major football tournaments take place, are something to look forward to. We tend not to drop out in the early stages of the tournament against smaller football nations, such as Iceland.
In contrast, being a German economist can be as frustrating as supporting the English national team (or so I imagine). Germans have a reputation for being austere – we favour tight monetary and fiscal policy and a large current account surplus. Not too long ago, a number of euro area economies, led by Greece, faced the prospect of sovereign default. In these circumstances it’s easy to heap blame on the reckless borrower, because that’s where the pressures manifest themselves most obviously. But that’s at best only half the story. Greece couldn’t have run up such a vast quantity of debt unless someone was willing to lend to it. The Greeks consumed too much, yes, but the Germans also saved too much. German economists tend to ignore the fact that it takes two to tango.
A recent comment by Gabor Steingart, the chairman of the Handelsblatt, provides a case in point. Last week, after the ECB’s decision not to announce a change to its monetary policy stance, he accused the ECB’s monetary policy of being “the largest expropriation from Germany since the Soviet industrial dismantling and the forced collectivisation by the SED [East German Communist Party]”.
In order for the euro area to rebalance on a sustainable basis, German households need to save less, i.e. consume more. Despite historically low interest rates, the saving rate of German households hasn’t budged. German households save just under 10% of their disposable income – the same proportion as in the early 2000s!
Additionally, Germany has benefited hugely from the ECB’s policies. Low interest rates and QE have driven asset prices, such as the DAX, German house and government bond prices, to all-time highs. Low and falling debt servicing costs have contributed to an increase in fiscal space. Although the effective euro exchange rate has more or less regained its pre-QE level due to the recent rally, it had fallen almost 15% in the meantime – a huge sugar rush for the self-declared ‘export world champion’. Spillover effects combined with cheap credit have boosted the wider economy, too. Driven by rising employment, domestic demand has picked up. And the resultant increase in tax receipts has boosted public revenues. In the first half of 2017 the budget surplus of Germany’s government amounted to €18.3 billion.
Clients will be aware that Fathom has been arguing for a while that low interest rates and QE damage the supply side of the economy when applied over a long period. This notwithstanding, Mr Steingart’s statement is wrong, at best (especially considering the upcoming elections). It’s perfectly feasible to argue that extraordinarily loose ECB policy has increased inequality. However, that complaint would have to be addressed to Wolfgang Schäuble, not Mario Draghi.
Mr Steingart’s comment would be less surprising, although equally intolerable, if one had read it in the Bild. But he is the chairman of the Handelsblatt, a leading German-language business paper. Even worse, his comment follows similar, although less severe, remarks by several German policymakers and economists. While the benefits of the ECB’s monetary policy, and the euro more broadly, seem obvious to non-German economists, they tend to be less clear to the German ones. Are German economists systematically biased?
According to the 2017 edition of the OECD’s Education at a Glance report, which was published this week, countries benefit from sending their students abroad. Studying abroad is an opportunity to acquire skills that may not be taught at home, and in the longer run, those who have studied abroad contribute to knowledge creation and enable their home country to integrate into global knowledge networks.
Data from the corresponding database show that 4% of all German students – unfortunately the OECD doesn’t provide separate data for those studying economics – are enrolled abroad. This is less than the OECD average, but higher than the share of other major euro area countries, such as France, Italy and Spain.
However, if German students go abroad it tends to be to other like-minded countries, i.e. countries with a preference for similar levels of austerity. The data show that they are well-represented in the numbers of international students in countries such as Austria, the Netherlands and Luxembourg.
A reinforcing cycle? Of course, in addition to the smaller language hurdles, these countries are not just intellectually close, but also culturally and geographically. This notwithstanding, perhaps incentivising German students to visit countries with less propensity to save could start to provide the solution to the euro area’s woes. Amplifying student mobility could rupture the current groupthink, increasing recognition of the benefits of the euro, and paving the way for increasing acceptance for further economic integration in Germany.
Or maybe it’s this author who is biased. After all, he left Germany to do his master’s in the UK where he met his girlfriend who comes from one of the periphery countries.
In any case, it’s only nine more months until the World Cup…