• Marco Annunziata

Logic is optional



Germany’s Current Account surplus has been harshly criticized by a number of pundits and economists—well before it attracted President Trump’s unwanted attention.


The accusation¸ laid out among others by The Economist in a lead article last year, starts from noting that a country’s current account balance equals its savings-investment balance; it then goes as follows:


1. Germans save too much and therefore Germany runs a current account surplus;

2. Since global trade is balanced, Germany is forcing some other countries to run a current account deficit—in particular, some of its European partners;

3. Since countries with a current account deficit save less than they invest, Germany is forcing other European countries to overspend / undersave.


Bottomline: (i) Germany bears the blame for the fiscal profligacy and debt troubles of weaker European partners; and (ii) the only way for weaker European countries to get back on track is for Germany to spend more and reduce its current account surplus.


I argued in a blog a year ago (Correlation, Causation and Chickens) that this makes no sense: it confuses correlation and causation and it reverses causation as it finds convenient. I think that blog still makes a good read.


So it amused me to find in The (same) Economist a couple of weeks ago an article that notes how the European countries that used to have the largest current account deficits have shrunk them substantially and in the case of Italy, Spain and Portugal turned them into surplus…while Germany’s current account surplus has gotten larger.


I reproduced below the chart from The Economist, comparing the latest current account balance to the average for 2004-2007; to check more recent developments I have added a chart showing the average for 2010-2016. In both cases the message is the same. In other words, the idea that weaker European members could not reduce their deficits unless Germany cut its surplus was wrong.



Amusingly, The Economist’s chart shows a correlation between a growing German surplus and an improving external balance for Southern European countries; should we conclude that the former caused the latter and call for an even larger German surplus?


Of course, we must still blame Germany. The Economist goes on to argue that (i) the adjustment in Spain, Portugal and Greece would have been a lot less painful if Germans had spent more (and imported a lot more of…well, anything as long as produced in Southern Europe…; (ii) now the Eurozone as a whole has a larger current account surplus, through which Germany pushes the problem onto the rest of the world.


When it comes to current account discussions, it seems, logic is optional, but blaming Germany is mandatory.

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