The two countries referred to in the title of this week’s contribution are the US and Germany. The decision that each has to take is their future medium- to long-term economic strategy. Both countries will be having an election over the next 12 months.
The US will be having its presidential elections in November and, whatever happens, it will be a new president, as Barack 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 will 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 would 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.
Given the strength of Germany and the US in the global economy, whatever decision they take is likely to have an impact on the rest of us
Both countries could easily fall into 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 on 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 17 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 eurozone countries? It is certainly benefitting from a weak euro, which is more due to the other large economies forming part of the eurozone. 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 eurozone? And if it does not, what would be the consequences?
We come to the US. The US 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 10 years ago (and that is likely to happen at some stage or another, even if in another 10 years), the deficit becomes unsustainable. The US is also aware that its future growth rate is more likely to be around the two per cent level per annum than the 3.5 per cent 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 US 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.
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