Germany must abandon its record surplus and rebalance

The economy needs higher domestic investment and to tackle low pay

Anke Hassel

The Current Account Counts

Stephen S. Roach  



NEW HAVEN – In an increasingly interconnected global economy, cross-border trade and financial-capital linkages have come to matter more than ever. The current-account balance, the difference between a country’s investment and saving position, is key to understanding these linkages. The dispersion of current-account positions tells us much about the state of global imbalances, which are often a precursor of crises.

The same is true of trade tensions, such as those now evident around the world. Current-account disparities often pit one country against another.

Economies running current-account deficits tend to suffer from a deficiency of domestic saving. Lacking in saving and wanting to invest, consume, and grow, they have no choice but to borrow surplus saving from others, which gives rise to current-account and trade deficits with the rest of the world. The opposite is the case for countries with current-account surpluses. They are afflicted by subpar consumption, excess saving, and chronic trade surpluses.

There is a long-standing debate over who is to blame for this state of affairs – the deficit countries, which draw freely on the saving of others to finance economic growth, or the surplus countries, which choose to grow by selling their output in foreign markets. This blame game, which has long been central to disputes over international economic policy and trade tensions, is particularly contentious today.

The United States has the largest current-account imbalance in the world. It has recorded a deficit for all but one year since 1982, the sole exception being 1991, when foreign contributions to its military campaign in the Persian Gulf underpinned a miniscule surplus (0.05% of GDP).

During the 2000-2017 period, the US amassed $9.1 trillion in cumulative current-account deficits. That is larger than the $8.9 trillion of cumulative surpluses run collectively by the three largest surplus economies – Germany, China, and Japan – over the same period.

Many observers believe that the US is doing the rest of the world a huge favor by running chronic current-account deficits – namely, supporting the large surplus countries, which tend to suffer from a shortfall of domestic demand. Others, including me, are more critical of America’s long-standing penchant for excess consumption and the role that surplus economies play in enabling it. While there is undoubtedly some validity to both points of view, I worry more about the destabilizing role of the US.

America’s consume-now-save-later mindset, which is at the heart of its current-account deficit, is deeply embedded in its political economy. The US tax code has long been biased toward low saving and debt-financed consumption; the deductibility of mortgage interest, the absence of any value-added or national sales tax, and a dearth of saving incentives are especially problematic.

So, too, are the wealth effects from a profusion of recent asset bubbles. Aided and abetted by the Federal Reserve’s über-accommodation since the late 1990s, there was no stopping the interplay between America’s asset-dependent economy and an equally pernicious leverage cycle underwritten by bubble-inflated collateral. Why save out of income when frothy asset markets can do the job? The preference for asset-based saving over income-based saving is central to America’s current-account deficit.

The surplus countries have been delighted to go along for the ride. It didn’t matter that the US consumption binge was built on a foundation of quicksand. Excess export growth in the large surplus economies enabled the excesses of the world’s largest consumer.

That was especially the case in China. Spurred by Deng Xiaoping’s “reform and opening up,” China’s export sector increased sixfold – from 6% of GDP in 1980 to 36% in 2006.

Mirroring America’s massive current-account deficit, China’s current account went from relative balance in 1980 (+0.1% of GDP) to a massive surplus of 9.9% in pre-crisis 2007. The same was true in major developed economies, albeit to a lesser extreme: Germany’s export share of GDP went from 19% in 1980 to 43% in 2007, while Japan’s went from 13% to 17.5% over the same period.

In many respects, a marriage of convenience between the surplus and deficit countries eventually blossomed into full-blown codependency. But then, with the wrenching global financial crisis in 2008, the music stopped. Since then, frictions between deficit and surplus countries have intensified, now risking the possibility of a full-blown trade war.

President Donald Trump’s administration has played an especially antagonistic role in asserting that the US is being victimized by large trade deficits. Yet America’s trade gaps have, in fact, been spawned by a chronic deficiency of domestic US saving. Despite the government’s recent upward revision to a still-depressed personal saving rate, the overall US national saving rate, which drives the current account, remains woefully deficient, averaging just 1.9% in net terms (adjusted for depreciation) over the post-crisis 2009-17 period. That is less than one-third the 6.3% average during the final three decades of the twentieth century.

Large and growing federal budget deficits over the next several years will only exacerbate this problem. Blaming China misses the obvious and important point that the Chinese current-account surplus has fallen sharply in recent years, from 9.9% of GDP in 2007 to an estimated 1% in 2018. In 2017, China’s current-account surplus of $165 billion was well below that of Germany ($297 billion) and Japan ($195 billion).1

As China presses ahead with consumer-led rebalancing, it will continue to move from surplus saving to saving absorption, with the distinct possibility that its current account will shift into permanent deficit (a small deficit actually was recorded in the first quarter of this year). That will leave a deficit-prone America with one less surplus country to draw on in funding the growth of its saving-short, excess-consumption economy. Maybe the rest of the world will step up and fill the void. But with the Trump administration now disengaging from globalization, that seems less and less likely.

History suggests that current-account imbalances ultimately matter a great deal. A still-unbalanced global economy may be forced to relearn that painful lesson in the coming years.


Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of Unbalanced: The Codependency of America and China.

 Let The Emerging Market Bailouts Begin: “We Don’t Have Much Choice”

To understand why Europe is watching Turkey’s financial crisis with alarm, you just have to see this chart:





Spanish – and to a lesser extent French and Italian – banks have lent a lot of money to Turkey.

So as that country spins closer to default, those banks and their governments are in danger of having massive holes punched in their financial structures.

With Greece its usual mess and Italy’s bond yields spiking, the last thing Europe needs is a banking crisis. So, as today’s Wall Street Journal reports, the Continent is looking – as it always does – for Germany to step in and fix things:

As Turkey Teeters, Germany Considers Offering a Financial Lifeline
ISTANBUL—The German government is considering providing emergency financial assistance to Turkey as concerns grow in Berlin that a full-blown economic crisis could destabilize the region, German and European officials said. 

While the talks are at an early stage and may not result in any aid, the possibilities being discussed range from a coordinated European bailout similar to the kind deployed during the eurozone debt crisis to project-specific loans by state-controlled development banks and bilateral aid. 

Berlin fears a meltdown of the Turkish economy could spill over into Europe, cause further unrest in the Middle East and trigger a new wave of immigration toward the north. 

“We would do a lot to try to stabilize Turkey,” a senior German official said. “We don’t have much choice.” 

Other European governments have grown equally concerned. Hosting his Turkish counterpart in Paris on Monday, French Finance Minister Bruno Le Maire said it was important to support Turkey’s efforts to repair its economy. 

Why You Should Care About Turkey’s Meltdown

But economists say it is too early to pin down how much money Turkey, a member of the North Atlantic Treaty Organization, might need because much of its potentially troubled debt is in private hands. They have pointed to Argentina, a smaller emerging economy facing similar problems, which received a $50 billion credit line from the International Monetary Fund in June. 

Two senior officials in Berlin said German Finance Minister Olaf Scholz had discussed some of the options with his Turkish counterpart Berat Albayrak in recent conversations. 

Such aid would mark a striking rapprochement between Germany and Turkey, which despite having been close allies for over a century have become increasingly estranged in recent years as Turkish President Recep Tayyip Erdogan’s rule has grown more authoritarian. 

Mr. Erdogan is due to visit Berlin on Sept. 28. Financial aid will be on the agenda a week earlier, when Messrs. Scholz and Albayrak are expected to meet in Berlin to prepare the president’s trip. 

Germany’s attitude contrasts with that of the U.S., which has shown little interest in calming markets as they pummeled the Turkish currency, the lira, earlier this month.  

On the contrary, President Trump, locked in a dispute with Mr. Erdogan over the detention of a U.S. pastor in Turkey, has piled sanctions and new tariffs on the country. 

German officials said such policies might have amplified Turkey’s woes and reduced market confidence. 

“This is an absolutely insane and ill-informed policy,” said one senior German oficial. 

Berlin’s main concern is that a crisis could undo a landmark deal with Turkeyunder which Ankara has cracked down on Europe-bound refugees passing through its territory in exchange for funding. Germany experienced a popular backlash after the country took in nearly two million asylum seekers since 2015. 

The collapse of the lira—it has lost 40% of its value against the dollar this year—has pushed up inflation and put pressure on companies and individuals who have loans denominated in foreign currency. The threat of mass defaults, in turn, has been weighing on Turkish Banks. 

Ultimately, however, Europe may find it inevitable to provide some form of assistance to Turkey, a senior EU diplomat in Ankara said. 

“We cannot just sit and watch Turkey go down the drain. The migration pressure and the geostrategic importance, as well as the economic links, are too important,” this person said.

Note that the first step in the process doesn’t involve any actual money changing hands.

Germany just announces that it’s “considering” helping out and hopes that this will be enough to stabilize the Turkish lira, giving its government breathing room to bring its finances – and its relationship with President Trump – back into balance.

This step usually fails, alas, because by the time a country enters a currency crisis as severe as Turkey’s, everyone understands that its problems are deep-seated and systemic, and thus not something that a little breathing room will fix.

Next up apparently will be an emerging market bailout in the form of a Europe-wide set of loan guarantees (managed and backstopped by Germany) that will, hopefully, not have to be activated.

This might work if the guarantee is big enough relative to the debts coming due. But in effect the result is the swapping of Spanish loans to Turkey for German loans. And there’s a limit to how much of the world’s debts even Germany can take on.

Turkey, meanwhile, is just the beginning. Tunisia is teetering, Brazil’s currency is falling, and a big chunk of the Middle East has external debt but little in the way of resources to cover it.




By the time this latest emerging market bailout is complete, the amount of debt added to developed world balance sheets could be enough to spread the pain pretty widely.

Beijing's Banking Overhaul

China is considering a central bank reform to give itself more clarity and control.

By Phillip Orchard        

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