Two countries, one decision

Lawrence Zammit's article on The Times of Malta

The two countries referred to in the title of this week’s contribution are the United States of America and Germany. The decision that each have to take is their future medium to long term economic strategy. Both countries will be having an election over the next twelve months.

The USA shall be having their presidential elections in November, and whatever happens it will be a new president, as President Obama will be stepping down after eight years. Moreover it is very uncertain as to whether their legislative arm, the Congress, will be controlled by the same party as that of the eventual new president.

Germany shall be having its elections next year. Angela Merkel, may still end up being Chancellor, but it is not certain who her coalition partners would be or if she will need any coalition partners at all to form a government. Admittedly the latter is a very unlikely possibility.

In spite of the economic uncertainty across the globe, both economies are doing well. Both economies are seen as the locomotive of the global economy; maybe Germany is seen as such more within a European context. Their one decision is which way to go.

Both countries could easily fall to the temptation of retrenching to make sure that their respective people enjoy the benefits of their economic growth. Both countries are enjoying the benefits of low inflation and low interest rates. Both know that future average growth rates are likely to be less than what they were accustomed to during the good days of pre-2008. So where do they go from here?

Thanks to a weakened euro, Germany has been having increasing surpluses on its foreign trade account. It is close to nine per cent of its gross domestic product. This surplus is so great that it is even higher than that of some oil producing countries such as Norway. Yet, Germany does not export any natural resources but goods and services that the rest of the world wants to buy.

The problem is that this surplus has produced such an immense amount of wealth that Germany does not know how or does not want to spend it in consumption or productive investment. Savings are being accumulated; but such savings are not generating any further wealth. The rest of world cannot understand this parsimony, especially since investment in Germany has fallen significantly since 2008 and personal consumption as a percentage of gdp has decreased by five percentage points since 2010.

The opportunities for public investments abound. Germans would tell you that road infrastructure requires a massive injection of capital. There is also the commitment of the country to dismantle seventeen nuclear power stations. So it is as if, Germany is benefitting from the willingness of the rest of the world to buy its goods and services, but once it receives the money it is hoarding and not spending it; thereby blocking the circular flow of money.

What is the decision that Germany needs to make? Is it willing to stimulate its internal demand and encourage imports from other euro zone countries? It is certainly benefitting from a weak euro, which is more due to the other large economies part of the euro zone. Should Germany adopt a medium to long term policy to spill over the benefits it has obtained from the weak euro to the other EU member states, and in particular the other members of the euro zone? And if it does not what would be the consequences?

We come to the USA. The USA has a fiscal deficit that can be described as enormous. It is not as yet unsustainable because of the current level of interest rates. Once interest rates go back to where they were ten years ago (and that is likely to happen at some stage or another, even if in another ten years), the deficit becomes unsustainable. The USA is also aware that its future growth rate is more likely to be around around the 2% level per annum than the 3.5% level that it was used to before.

A solution that has been proposed to address this lower growth rate, is in the form of increased public spending to stimulate aggregate demand. However this cannot be a long term solution as most economists agree that this can only have a short term benefit. Moreover increasing public spending is a solution to address a recession. The US economy is certainly not in recession.

The longer term solution would be initiatives to increase productivity. The extent to which the two presidential candidates, Clinton and Trump, believe that the US needs to increase productivity remains to be seen.

It may be said that the nature of the issues that Germany and the USA are facing are different. However, in any case, they relate to future economic strategy. Given the strength of these two countries in the global economy, whatever decision they take is likely to have an impact on the rest of us. So it may make sense to wait in trepidation as to which way their economy will be steered by their respective governments.

Latest News