In a recent article in the FT, Otmar Issing suggested that there are no good reasons for a country like Germany — which enjoys near-full employment and has a balanced budget, a debt “far above target” and an extremely loose monetary policy — to embark on an expansionary budget policy. He asks: “Where is the economic textbook that argues that such a country should run a deficit to stimulate the economy?”
The argument may sound convincing but one key variable is missing: Germany’s national savings exceed national investment by more than 6 per cent of GDP. This long-running current account surplus derives from Germans’ desire to accumulate wealth, in particular in view of their retirement. The problem is that the German economy does not produce enough assets to satisfy this wish. If Germany was a closed economy, the excess of savings over investments would lead to a sharp fall in interest rates to levels even lower than the current ones and to a protracted deflation.
Read more