The German Current Account Surplus and Krugman's Critique

Abstract

Global structural imbalances in international trade have become a major topic in particular after the Great financial and economic crisis in 2008. China and Germany have been running major balance of trade in goods and services surpluses as well as balance of current account surpluses in the past decade. Contrary other countries including the US on top have run major current account deficits at the same time. Now, after some time of quarreling about the global recovery, this debate on – how to correct for those global imbalances – is back on the transatlantic agenda. This time Germany is the major villain, because last year Germany's current account surplus reached a 7 percent to GDP level. However, this is already rebalancing and the future new German government is planning policy measures like a major increase in public infrastructure investments, introducing a minimum wage for the whole economy, increasing public spending in education and training, which would stimulate domestic demand and growth in Germany in the coming year. The paper looks at the empirical facts of the past couple of years related to the rebalancing of international imbalances already under way. It confronts these findings with the harsh critique of Paul Krugman published in the New York Times, who blames German politics as the major source for the current global imbalances. Looking at the facts much of the blame Krugman addresses on misguided German politics cannot be confirmed to be in line with the available statistics and most recent forecasts.