Germany has seen a massive increase of its net international assets due to large and persistent current account surpluses. Current account surpluses have consistently exceeded 4% of GDP since 2004 and have occasionally exceed a stunning 8% of GDP. As a share of GDP, Germany’s net foreign creditor position is equal to Japan’s and larger than China’s. Germany’s gross and net position may not be particular large compared to that of some small, open economies, especially those with large international banking sectors (Hong Kong, Singapore, Switzerland, Luxembourg). But among the G-20, Germany and Japan do stand out in terms of their net position. The sharp rise in surpluses began in the early 2000s, roughly coinciding with the introduction of the euro and domestic labour market reform. In spite of the uncertainty due to the current global health crisis, Germany will continue to run surpluses for the foreseeable future and add to its net external creditor position.
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| Source: IMF |
Gross assets and gross liabilities have also risen. Gross external assets reached 280% of GDP in 2019, up from 145% in 2000. Gross external liabilities increased to 212% of GDP last year, up from just over 140% two decades ago. Being a large creditor is obviously less fraught with risk than being a debtor. Even though gross liabilities have surged, they are not a major source significant risk, either. With the exception of the general government, all sectors are net foreign creditors. If the balance sheet of the general government and the Bundesbank are consolidated, the net foreign debt position is only half as large. More importantly, the German government’s external debt is actually a sign of financial strength. Foreigners are keen to own German government. Extraordinarily low bond yields are partly a reflection of this. Moreover, sound macroeconomic management, a track record economic stability and (until recently) a strong commitment to a balanced budget translate into minimal risk. Last but not least, around 2/3 of total Germany liabilities consist of either equity-type instruments (FDI, portfolio equity) or long-term bonds. The liability side of the balance sheet is not a problem. As far as foreign assets are concerned, they are relatively well-diversified. Geographically, foreign asset holdings are concentrated in the euro area (50-55%) with the UK and the US making up another (combined) 20% or so of total holdings. In short, however one slices and dices it, the risk attaching to Germany’s foreign liabilities is extremely low and, structurally speaking, the risk attaching to its foreign assets appears manageable.
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| Source: Bundesbank |
Germany’s external surpluses and foreign asset accumulation have been criticised on the grounds of generating only modest financial returns (Jaeger & Mayer 2012). (They have also been criticised as “beggar-thy-neighbour” policies, but this is another matter). There may be something to it or there may not. A lot depends on how returns are measured, over what time period and what the returns are compared to. Furthermore, financial returns only measure the financial benefits attaching to foreign assets. Other more difficult-to-calculate benefits may attach to foreign assets such as supply chain diversification (in the case of FDI) or asset diversification (in the case of portfolio investment). Should German returns be compared to the returns earned by Japan (or China)? Should German returns be compared to comparable domestic investments? Should returns take into account (unrealized) valuation changes at the time they are measured? In a global environment characterised by extra-low interest rates, even originally modest financial returns are beginning to look attractive.
Nonetheless, it is worth asking whether the continued accumulation of net foreign assets is a sensible thing to do. Of course, one might always argue the external surpluses are simply the outcome of private market transactions. That’s largely true. But if economist learnt one thing in the past couple of decades, it is that market-driven outcomes can lead to major systemic risk and instability. German economists and government official usually point out that it is not the role of public policy to second-guess the desirability of large surpluses and increasing net assets. Undoubtedly, Germany’s external position can be explained by any combination of the following: (1) macroeconomic policy mix, (2) demographic changes, (3) ‘cultural’ propensity to save, (4) attractive investment opportunities abroad. While accumulating net foreign assets sounds like a good problem to have, the global financial crisis in 2008 also demonstrated that doing so is not without risk in spite asset and geographic diversification. German banks suffered considerable losses on their holdings of CDOs. Today Germany’s balance sheet would take a significant hit in case a major Target-2 debtor in euro system were to ditch the euro.
Might it not make sense for the public sector to start dissaving in order to fund increased domestic investment and slowly reduce external surpluses? If one is of the view that the rapid accumulation of foreign assets is accompanied by increasing credit risk, then it might make sense to adjust macroeconomic policy accordingly. Again, Germany is very attached to ordo-liberalism and it has been generally been reluctant to manage its macroeconomy actively – for a range of ideological, intellectual, historical and institutional reasons. The Keynesian experiment did not last long. However, this has never meant that the German government is not prepared to take forceful action if the circumstances call for it (1990, 2008, 2020).
Prior to the economic shock due to the epidemic, a good case could be made for the German government to fund productivity-enhancing infrastructure investment. And the case remains a good one. Like many other countries, Germany was experiencing low productivity growth, underinvestment and limited wage increases in the context of full employment. It was possible to argue, and many leading German economists did so, that the German economy was in macroeconomic equilibrium. An expansionary, investment-oriented fiscal policy would have led to overheating and reduced the fiscal space that was best to be preserved to confront the next economic downturn. However, if external surpluses remain large in the aftermath of the global health crisis and German foreign assets continue to increase, including in countries faced with significant post-crisis economic and financial challenges, then there continues to be a solid for a fiscal policy geared towards public-sector-supported/ -funded investment. Such a policy would be countercyclical and help deal with the recession and it would help reduce external surpluses and slow external asset accumulation. Such a policy would be affordable given Germany’s solid fiscal and government debt position. It would help limit an increase in risk attached to further increases in foreign assets. It would help unlock productivity growth domestically and generate important that would benefits Germany's major trading partners. It therefore comes down to whether or not the German government can devise a policy that is successful in identifying sufficiently profitable investment projects and in channeling excess domestic savings into profitable, productivity-enhancing investments in a timely manner? If it can, it will be able to kill three birds (economic downturn, increasing external assets and domestic productivity) with one stone (investment-focussed fiscal policy).