Using empirical evidence from panel analysis of current account dynamics and of bilateral trade balances, the paper argues that the large German current account surplus during the 2000s can be explained by an increasing gap between productivity growth in manufacturing vis-à-vis services. Such a gap is due not only to improvements in the manufacturing sector but also to a significant slowdown of productivity growth in services. Therefore, despite the success in export markets, the German surplus may signal long-run weaknesses associated with constraints on service sector productivity growth and the inability of productivity growth in manufacturing to create positive spill-over effects on services. Persistence of barriers to liberalisation in services as well as the dominant type of technological progress in manufacturing, based on improving the efficiency of existing products, may partly explain these phenomena. A key factor behind these sectoral differences is the education system, which relies on highly specialised vocational schools, generating high returns for on the job training and creating incentives for efficiency gains in existing products and sectors. The paper concludes that there is room for comprehensive structural policies consistent with an equilibrium reduction in the current account surplus, accompanied by higher and more balanced growth. Global imbalances in the form of large current account deficits/surpluses are at the center of the international policy debate.
According to recent studies (see for instance Cheung et al., 2010), the German surplus in the period 2004-08 cannot be explained on the basis of a traditional model referring to typical determinants of the current account (e.g. demographics, growth rates, macroeconomic policies).
Although the China-US mirror imbalances are those that have attracted more attention, developments in the euro area have raised the issue of sustainability of the monetary union in a context of large imbalances. Large deficits in the so-called periphery of the euro area are mirrored by the large surplus of Germany. Although the accumulation of surpluses with respect to peripheral euro area countries has been a relevant aspect of the increased German surplus during the 2000s, non-euro area countries account for a large proportion of the German surplus too. For instance, in the sample of OECD countries, the trade surplus with respect to Greece, Portugal and Spain accounts for about 10% of the sum of all surplus positions of Germany with OECD countries, whereas the UK and the US each account for more than 12%. However, before jumping to the conclusion that the surplus requires policy interventions one should establish that the surplus is the result of distortions and not an equilibrium phenomenon.
Two different interpretations of the same phenomenon have been advanced: one claiming that the surplus reflects the competitiveness of the German industry in world markets5; the other, asserting that the increase in net exports reflects the compression of domestic demand due to high domestic savings associated with precautionary reasons6 In fact, both interpretations share the view that reforms in the labour market ensured wage moderation, labour market flexibility (part-time and temporary jobs) and a consequent increase in profits and competitiveness of German firms. Moreover, the same labour market reforms might have increased job insecurity and uncertainty among workers, with a consequent increase in precautionary savings and thus compressing consumption (Bertola and Lo Prete, 2011).
Although both views find prima facie empirical support, with the competitiveness view supported by the rapid increase in productivity in the German manufacturing industry and the precautionary savings view supported by the sizable increase in national savings, a closer look at the data suggests a more nuanced interpretation. On the productivity front, it is remarkable that the increase in productivity in manufacturing has been accompanied by stagnant productivity in the service sector, which is in striking contrast with the US.
More generally, the positive results on exports are related to the so-called "intensive margin", with an increase in exports in existing products rather than in new products. Among EU countries, Germany has the largest share of export growth due to the intensive margin, and the lowest from new products, as shown in Cheptea et al. (2010).
Moreover, productivity growth has been achieved with a contribution of technologically intensive investments that is still well below the levels of countries like the US. Furthermore, the bulk of Germany’s export share gains was achieved in technologically low market segments (Cheptea et al., 2010). In summary, despite the positive signs of increased competitiveness there are some signals of potential longer term weaknesses.
Regarding the precautionary savings view, the evidence is weak as the increase in savings took place not in the household sector but in the corporate sector. The channel of transmission from reforms, especially in the labour market, and the current account is therefore different from the one envisioned in the precautionary savings approach. Corporate savings have been boosted by labour market reforms, leading to a sizable redistribution of income from wages to profits and thus a consequent reduction of propensity to consume, which is usually much higher for wage income than for profits
In this paper, we follow a different approach from those outlined above and we will focus on the relative role of "supply side" factors and factors associated with the potential role of labour market reforms. We argue that the puzzling surplus in the current account of Germany in the 2000s can be explained by an increasing gap between productivity growth in manufacturing vis-à-vis the service sector.
Coricelli, F. and A. Wörgötter (2012), “Structural Change and the Current Account: The Case of Germany”, OECD. Economics Department Working Papers, No. 940, OECD Publishing.
OECD Economics Department Working Papers No. 940