What Should Surplus Germany Do?

Germany's large current account surpluses have been criticized as a major cause of slower economic growth in the euro area periphery, especially Greece, Spain, and Italy. Critics repeatedly call on Germany to boost domestic demand and allow wages to rise. This Policy Brief argues that Germany should indeed act to reduce its current account surplus, but not for the reasons that critics give. Rather the German government should recognize that its large surpluses expose German savers to potential financial losses, bailout costs, and opportunity costs associated with low (negative) domestic real interest rates. Instead of accelerating wage growth in excess of productivity, Germany should increase public investments in the domestic economy and raise its ceiling on public indebtedness.

Data disclosure: The data underlying this analysis are available here [xlsx].