Germany's stubborn current account surpluses pose a threat to global financial stability, Maurice Obstfeld, chief economist at the International Monetary Fund (IMF), warned on Monday.
Writing in the newspaper WELT, Obstfeld cautioned that continued growth of disequilibrium in the international balance of payments would create "mid-term risk of global financial stability". The IMF economist hereby singled out the United States and United Kingdom for running excessive current account deficits on the one hand, and countries such as Germany and Japan for running excessive current account surpluses on the other.
The current account is an important economic indicator that measures the sum of a country's balance of trade and net income (or losses) from international investments. The Washington-based IMF has repeatedly criticized Germany for allegedly contributing to global imbalances with a narrowly-export-driven growth model.
The IMF argues that permanent surpluses above six percent of Gross Domestic Product (GDP) endanger economic stability because they imply corresponding deficits and a build-up of international liabilities in other countries. According to recent data by the IMF and World Bank, Germany has run current account surpluses above 8 percent of GDP for the past three years.
On Monday, Obstfeld argued that a lopsided cycle of capital and trade flows was likely to fuel protectionist policies without being beneficial to the countries running what the IMF deems to be 'excessive surpluses' above six percent of annual GDP. He noted that a high surplus was "not necessarily a sign of strength but an indicator of weak domestic investment and a household and corporate savings rate which is higher than needed." Berlin should consequently increase government spending, especially in public infrastructure, to animate companies to invest more at home.
Because current account imbalances are inherently reciprocal, however, any sustainable adjustment in the international balance of payments would also require chronic deficit countries like the United States and United Kingdom to take parallel steps to improve their situation as well.
Countries which run continuous current account deficits live beyond their means by borrowing funds abroad to delay the recalibration of domestic consumption and saving needed for "adjustment" of the current account to take place. Obstfeld recommended to Washington and London to reign government spending, encourage households to save more and adopt tighter monetary policy towards this end.
If surpluses and deficit countries did not act quickly to achieve adjustment, imbalances would grow even larger and potentially provoke a re-run of the 2007/08 global financial crisis. "The net external positions will diverge even further. That increases the risk of disruption by current or asset price adjustments in indebted countries, to the disadvantage of all", Obstfeld wrote.
If foreign governments and private actors currently lending money to the United States lost faith in the country's macro-economic trajectory due to mounting deficits, a resulting flight from the dollar and dollar-denominated could spark a global recession. "If there is sudden adjustment, then both the debtor and creditor countries will suffer", the IMF chief economist warned.
