knows the stereotypes. Germans save for the future, while Spaniards spend
everything they earn. So it's not surprising that Germany has survived the
recent crisis in decent shape, while Spain is a mess, with unemployment at
roughly 27 percent. If only the Spaniards had been as thrifty as the Germans,
this never would have happened, right?
The spending patterns of Spanish households did not cause the euro crisis, but
were a response to the imbalances created by excess savings in Germany.
Furthermore, these excess savings were not caused by the thriftiness of German
households, but by policies that forced up German savings rates to levels that
Europe could not absorb without creating serious imbalances.
savings and household savings are often assumed to be the same thing, but are
actually very different. The household savings rate is the share of household
income -- mainly wages, investment income, and social transfers like welfare
payments and pensions -- that households do not spend on consumption.
national savings rate, on the other hand, includes not just household savings,
but also the savings of governments and businesses. It is defined simply as a
country's GDP minus its total consumption. While the household savings rate is
determined primarily by the cultural and demographic preferences of ordinary
households, the national savings rate is not. Indeed in some cases, such as
China and Germany, the household share of all the goods and services a country
produces, which is primarily a function of policies and economic institutions,
is the main factor affecting the national savings rate.
savings, in other words, have very little to do with household preferences and
a lot to do with policy. Take China, which has by far the highest national
savings rate in the world at roughly 50 percent. This is in part because
Chinese households, like those of many poor countries lacking a robust social
safety net, save a high proportion of their income.
while China's savings rate is extraordinary, Chinese household savings rates
are merely on the high side, and on par with other East Asian nations. Chinese
households, it turns out, are not nearly as thrifty as their exceptionally high
national savings rate implies. Why, then, is China's savings rate
unprecedented? The main reason is the very low household income share of GDP.
Chinese households retain a lower share of all the goods and services the
country produces - around 50 percent -- than households in any other country in
is a consequence of policies Beijing put into place over the past two decades
that goose GDP growth by constraining growth in household income. These include
low wage growth, an undervalued currency, and extremely low interest rates, all
of which reduce household income while subsidizing growth. As a result, the
household share of China's total production of goods and services has been
falling for 30 years, from 60-70 percent in the 1980s to 50 percent today. Consequently, as households earn a
declining share of what China produces, they also consume a declining share. China's high savings rate, in other words, has little to
do with Chinese thrift, and much more to do with policies that reduced the
share of Chinese household income relative to GDP. This is also true in
In the 1990s, Germany saved too little. It ran current
account deficits for much of the decade, which means it imported capital to
fund domestic investment. A country's current account deficit is the difference
between how much it invests and how much it saves, and Germans in the 1990s did
not save enough to fund local investment.
But this changed in the first years of the last decade. An
agreement among labor unions, businesses and the government to restrain wage
growth in Germany caused the household income share of GDP to drop and, with
it, the household consumption share. Because the relative decline in German
household consumption powered a relative decline in overall German consumption,
German saving rates automatically rose.
Notice that German savings rate did not rise because German
households decided that they should prepare for a difficult future in the
eurozone by saving more. German household preferences had almost nothing to do
with it. The German savings rate rose because policies aimed at restraining
wage growth and generating employment at home reduced household consumption as
a share of GDP.
As national saving soared, the German economy shifted from
not having enough savings to cover domestic investment needs to having such
high savings that not only could it finance all of its domestic investment
needs, but it had to invest abroad by exporting large and growing amounts of
savings to fund foreign purchases of its excess production. As it did so its
current account surplus soared, to 7.5 percent of GDP in 2007.
It is tempting to interpret Germany's actions as the kind
of far-sighted and prudent actions that every country should have followed in
order to keep growth rates high and workers employed, but these policies did
not fix unemployment in Europe; they merely shifted unemployment from Germany
to elsewhere. How? Because Germany's export of surplus savings was simply the
flip side of policies that forced the country into running a current-account
To understand why, pretend that Europe consisted of only
two countries: Spain and Germany. Forcing down the growth rate of German
wages relative to GDP caused the
household income share of GDP to drop. Unless this was matched by a decision
among German households to become much less thrifty, or a decision by Berlin to
sharply increase government consumption, consumption as overall share of GDP
would drop. This is just another way of saying that the German national savings
rate had to rise.
As German savings rose, eventually far exceeding investment,
Germany had to export the difference, which its banks did largely by making
loans into Spain. Declining consumption left Germany producing more goods and
services than it could absorb domestically, and it exported excess production
as the automatic corollary to its export of savings.
The rest of the world had to absorb excess German savings
and run the current-account deficits that corresponded to Germany's surpluses
because one country's trade surplus is another's deficit, and one country's
export of savings is another's import. And that's exactly what happened: The
eurozone countries -- in this example, Spain -- that joined the monetary union
with a history of higher inflation and currency depreciation than Germany saw
their trade deficits expand dramatically or their surpluses turn into large
deficits shortly after the creation of the single currency.
way in which Spain absorbed German exports of savings is at the heart of the
subsequent crisis. As long as Spain -- thanks to the euro -- could not use
interest rates, trade intervention, or currency depreciation to block German
exports, it had no choice but to import Germany's excess, since investment and
savings must balance. This meant
that either Spain's investment would have to rise or its savings would have to
fall, or both.
occurred. Spain increased investment in infrastructure and in real estate, but
it seems to have done both to excess, perhaps because of the sheer amount of
capital inflows -- its much- smaller economy was swamped by the large amount of
German savings. After nearly a decade of inflows larger than any it had ever
absorbed before, Spain, like nearly every country in history under similar
circumstances, ended up with massive amounts of misallocated investment.
this was not all. If the savings that Germany exported into Spain could not be
fully absorbed by the increase in Spanish investment, the only other way to
balance was with a fall in Spanish savings. There are two ways Spanish savings
could have fallen. First, as Spanish manufacturers lost out to German
competition, Spanish unemployment could rise and so force down the Spanish
savings rate (unemployed workers still consume). Second, Spain could have
reduced household savings voluntarily by increasing consumption relative to
income. Higher Spanish consumption would cause enough employment growth in the
services and real estate sectors to make up for declining employment in the
tradable goods sector.
surprisingly, given the enormous optimism that accompanied the creation of the
euro, the latter happened. As German money poured into Spain, helping ignite a
stock and real estate boom, ordinary Spaniards, especially those who owned
their own homes, began to feel wealthier than they ever had before. Thanks to
this apparent increase in wealth, they reduced the amount they saved out of
current income, as households around the world always do when they feel
wealthier. Together the reduction in Spanish savings and the increase in
Spanish investment (in infrastructure and real estate) was enough to absorb the
full extent of Germany's export of excess savings. This happened in nearly all
of the deficit countries in Europe.
at what cost? The imbalance created by German policies to constrain consumption
forced Spain into increasing consumption and boosting investment, much of the
latter in wasted real estate projects. The moralizers who insist that Spain
wasn't forced into a consumption boom --"no one put a gun to their heads and
forced them to buy flat-screen TVs" is the typical criticism -- miss the point.
Because Germany had to export its excess savings, Spain had no choice except to
increase investment or to allow its savings to collapse, with the latter either
in the form of a consumption boom or a surge in unemployment. No other option
European crisis, in other words, had nothing to do with thrifty Germans and
profligate Spaniards, but with policies aimed at boosting German employment,
which also forced up German national savings rates. These excess savings had to
be absorbed within Europe, and the subsequent imbalances were so large (because
German's savings imbalance was so large) that they led to today's
this reason, forcing down the German savings rate substantially enough to give
Germany a large current account deficit is the least damaging way to unwind the
imbalances forced upon the region. Only in this way can countries like Spain
stay within the euro while decreasing unemployment.
lower German savings don't mean that German families should become less thrifty
-- only that the average German household should be allowed to retain a much
larger share of what Germany produces. If Berlin were to cut consumption taxes,
or cut income taxes for the lower and middle classes, or force up wages, total
German consumption would rise relative to GDP and so national savings would
fall -- without requiring any change in the prudent behavior of German
ask Spanish households to be more "German" by saving more is not only
impractical in an economy with 27 percent unemployment (unemployed workers
cannot increase their savings), it is counterproductive. Lower Spanish
consumption would cause even higher Spanish unemployment, until eventually
Spain would be forced to abandon the euro to regain control of its ability to
absorb or reject German imbalances.
long as it is part of the euro, Spain has no choice but to respond to changes
in German savings rates. This is the way balance of payments works. Thrift has
little to do with it.
Sean Gallup/Getty Images