1 Introduction

Ladies and gentlemen,

Three hundred years ago, a book was published that has since gone down in history as one of the most printed publications of all time.[1] It tells the tale of the son of a Bremen merchant who went by the name of Kreutznaer. This young man embarks on a sea voyage, is enslaved, then escapes, then procures a plantation in Brazil, and finally becomes stranded on a desert island. You will all know the protagonist by the name of Robinson Crusoe.

This story by the British writer Daniel Defoe immediately became a resounding success. Indeed, just one year after the original edition was published, as many as four German translations were already on the market, and Defoe lost no time in penning two sequels.

You might not be aware that Daniel Defoe had another bright idea that was also very well received, though it didn’t occur to him until quite some time later. Even as far back as 1697, he was recommending that “that all persons in the time of their health and youth, while they are able to work and spare it, should lay up some small part of their gettings as a deposit in safe hands ... to relieve them if by age or accident they come to be disabled”. If an institution were created for this purpose in every county in England, he wrote, poverty might easily be suppressed by helping people to help themselves.

However, the kind of savings institution which Daniel Defoe had in mind was first established not in England, but in Hamburg. It was here, in the year 1778, that the “Ersparungsclasse der Allgemeinen Versorgungsanstalt” was established – the world’s very first savings bank. So you could say that holding the German Savings Banks Conference here in Hamburg is a kind of homecoming. And if we look a little closer at the philosophy behind the savings banks, we can see a key aspect of the social market economy: the idea of “prosperity for all”. Having unfettered access to markets – in this case, to banking services – promotes this idea, and it is integral to Germany’s economic model.

That said, not everyone sees a rosy future ahead for this approach. An article in the February edition of the “Economist”, for instance, wondered: “Is the German model broken?”, to which the authors concluded: “It's time to worry.”[2] The openness of Germany’s national economy, they argued, has left it particularly vulnerable to trade conflicts. Germany, they wrote, was insufficiently prepared to meet the challenge of digitalisation, and its ageing population was an additional burden.

Concerns over whether the country’s economic model is fit for the future have been compounded by criticism. One frequently voiced accusation is that the German economy has been growing at the expense of others, as shown in particular by the high current account surplus which is increasingly also being used as an excuse for protectionism.

But it’s not just the external environment that is looking more challenging – people at home are also perceiving economic changes as a threat to our social cohesion. One particular concern is monetary policy, where policymakers are facing accusations that their non-standard policy measures are specifically widening the gap between rich and poor. The risks which the low interest rate environment poses to financial stability and the strain it places on banks are another topic of debate.

So Germany’s economic model is facing all manner of challenges, and it is a great pleasure for me to talk about some of these issues here today.

2 Torn between globalisation and deglobalisation

Ladies and gentlemen,

Daniel Defoe’s Robinson Crusoe did more than just write literary history – arguably as the first English novel. Since the 19th century, it has been a well of inspiration for economists such as France’s Frédéric Bastiat. And right up to the present day, Robinson Crusoe is sometimes cited in microeconomic textbooks as a role model for a fictitious “one man economy” that has no option but to create everything it needs to thrive by itself.[3] But the storyline only really gets exciting when Man Friday joins this economy as an economic agent. Because each man has different skills – one can catch more fish, the other is better at producing wheat – Robinson and Friday can each focus on their strengths and share the fruits of their labour. That's why they’re far better off together than they would be alone.

This scene from the Defoe classic illustrates that openness and interaction with other countries are a crucial ingredient in the German economy’s recipe for success. For instance, German businesses last year exported goods and services worth a total of roughly €1,600 billion to other countries around the world. That’s nearly half the country’s gross domestic product. At the same time, Germany imported goods worth almost €1,400 billion.

Yet globalisation is about more than just the exchange of goods – it's often also important to be have a foothold on the ground in other countries. In 2017, foreign direct investment by German businesses came to around €1,200 billion, and more than half of that figure was invested outside the EU. This promotes economic growth here in Germany. You see, researchers have found that investment abroad can also spur investment at home.[4] On the other hand, there were nearly 17,000 businesses in Germany which had foreign investors in 2017. These firms generated €1,600 billion in sales and employed over 3 million people.

The openness of the German economy and its global ties make our society more prosperous, besides opening up all manner of opportunities for our partners.

But that’s not to say that having a larger cake means that each piece of it will be bigger. That’s because it’s also true that global trade shifts employment prospects and relative wages within an economy, effectively creating winners and losers.

In the United States, the process of opening the economy to China in particular has led to swingeing cuts in manufacturing jobs because it's now cheaper to import industrial goods. It's a phenomenon economists have dubbed the “China shock”.[5] While trade with China has undoubtedly also created new jobs, the bulk of them are not in industry and are, moreover, located elsewhere.

Research suggests that, in Germany, increased trade with China and central and eastern European countries has also cost jobs. Yet at the same time, access to new markets also created new export and employment openings in the manufacturing sector itself.[6] On balance, researchers have found that more than 400,000 jobs have been created in industry. In other words, the China shock has been beneficial for Germany.

That said, viewing developments purely in terms of the bottom line can mask different effects at the sector, regional and individual levels. What it boils down to is giving as many people as possible the ability to reap the rewards offered by new markets and technologies. It cannot be said often enough: education is what counts here.

Commenting on the excellent state of Germany’s labour market, OECD Secretary-General Ángel Gurría was recently quoted as saying that: “Everyone wants to be Germany.”[7] We mainly have the reforms implemented in the past to thank for Germany’s good showing by international standards. The future will depend not just on labour market flexibility but also on having infrastructure that is fit for purpose. I feel that Germany has some catching up to do, particularly in terms of digital networks. Lastly, we need a tax and transfer system that can effectively cushion social hardship. This is another area where we need to make sure that corporate taxation levels are not too high by international comparison. Germany’s standing as a business location has deteriorated in relative terms following the tax reform in the United States and also the tax cuts enacted by some of our neighbours here in Europe.

Replacing openness with isolationism, however, would be the worst-possible response to the economic challenges and upheavals we are facing. Model-based analysis by the Bundesbank has found, for instance, that by introducing new tariffs, the United States runs the risk of damaging not least its own economy.[8] You see, higher prices mean less purchasing power for US consumers. Retaliatory tariffs introduced by other countries would probably do even more damage to the global economy and world trade. Quite simply, there are only losers in trade wars.

The trade dispute between the United States and China gives us an inkling of what this means. Bundesbank calculations suggest that the trade barriers already adopted could, on their own, shrink both countries’ respective output levels by 0.5% over the medium term and diminish world trade by 1%.[9] The medium-term impact of the US tariffs introduced last week has already been factored into these figures. And world trade did indeed decline noticeably at the turn of this year. So any further escalation of the dispute would stunt economic activity, particularly in the United States.

The model-based analysis finds Germany would also be affected, albeit to a lesser degree. No one should harbour any illusions that the economy might benefit from the conflict due to the rerouting of trade flows. Nor has America retracted its threat to impose additional tariffs on auto imports, which would hit German car makers hard – motor vehicles and motor vehicle parts worth €27 billion were exported to the United States in 2018.

This highlights something that is often overlooked: the importance of a strong Europe. Recent years have seen the EU commence trade talks with a variety of countries including Canada, Mexico and Vietnam. The free trade agreement with Japan – the Economic Partnership Agreement – entered into force on 1 February this year.

But it’s not just a matter of safeguarding our own European interests at the negotiating table. Bilateral agreements can never take the place of the rules-based multilateral trading system – hence the importance of preserving the global trade order and making it fit for purpose.

Something that is no less important than Europe’s openness to the outside world is our single internal market, which stimulates competition and productivity, and yields lower prices and greater product diversity. It has helped make Europe noticeably more prosperous. Recent investigations by a variety of economists suggest that the single market has added between roughly 2½% and 4½% to EU output levels thanks to trade growth alone.[10]

What is more, the single market enables businesses to harness potential economies of scale. This is likely to also be a factor when it comes to facing up to the challenges presented by the digital economy. And yet major advances have already been made towards a digital single market – just take data protection or the general ban on geo blocking. All in all, the European Commission estimates that the digital single market could trigger a surge in growth similar to that already seen from the action taken so far to forge a more integrated market for goods and services trading.[11]

Key factors in the single market’s success story to date have been European competition law and its consistent implementation by the European Commission.[12] The merger control debate we have seen these last few months should not detract from this.

Public calls to adopt protectionist measures to shield enterprises combined with promises that they will help improve the economy remind me a little of the petition which Frédéric Bastiat, the French economist I mentioned earlier in my speech, wrote in 1845.[13] Candlemakers and other manufacturers of light used this petition to complain that they were suffering from the unfair competition of a powerful rival. This rival, he wrote, is threatening to take over the domestic market with its fantastically low price. If only it were possible to pass a law banning this rival's light, it would be possible to boost demand for candles and all the associated products. All branches of agriculture, Bastiat claimed, would show an increased development to produce more tallow and vegetable oil, thousands of ships would be needed for whale fishing, and the economy as a whole would ultimately benefit. Perhaps you’ve guessed the nature of the rival that attracted the candlemakers’ scorn: it was the sun. And they asked for a law to be passed ordering the closing of all windows so that the light of the sun was unable to enter houses.

For all the scepticism about protectionism, it would be wrong to overlook the fact that the global trade order needs to be updated to protect intellectual property rights and facilitate fair competition.

3 The current account surplus

Ladies and gentlemen,

Protectionist measures are sometimes justified by reference to global imbalances. The individual countries have benefited unevenly from international trade, which is reflected in pronounced and sustained surpluses and deficits in the current account balances. The US Nobel Prize winner Robert Solow once very vividly illustrated the myopia of analysing bilateral trade balances: He said: “I have a chronic deficit with my barber, who doesn't buy a darned thing from me”.[14] After all, current account balances, generally speaking, are neither the stuff of the devil nor a virtue. 

The German current account surplus is the result of countless saving and investment decisions in Germany and abroad. It is the outcome of market-economy processes, which offer few avenues for corrective economic policy intervention. Some hope that higher tariffs will reduce current account balances. Yet this hope could be in vain, as our analyses suggest. While new import tariffs should reduce imports, foreign demand for exports would probably fall at the same time. Moreover, certain measures such as tax cuts or increased government expenditure would not significantly shift the current account balance. This is indicated by internal Bundesbank calculations using different models, and the Board of Academic Advisors to the Federal Ministry for Economic Affairs and Energy recently drew a similar conclusion.[15]

That said, Germany’s current account surplus is very high. Set in relation to economic output, it reached a record level of 8.5% in 2015. Although it has fallen significantly since then, at 7.25% last year it still exceeded the threshold value of 6% used by the European Commission to identify macroeconomic imbalances. It is, therefore, reasonable to ask to what extent such a balance is sustainable in the long term.

Naturally, the current account surplus reflects many factors, not least external factors.[16] The rise in corporate savings has been a key driver of developments since the turn of the millennium. According to a Bundesbank study, the fact that a lower share of the profits was distributed to company owners played a role in this.[17] The intention was probably to strengthen the companies’ capital base in the face of a rather high volume of debt. But the causes of the increased corporate savings still have to be clarified conclusively.

One thing is certain: a current account surplus reflects the fact that an economy exports more products and services than it imports. At the same time, it implies that the country saves more than it invests. As a result, another economy can invest correspondingly more than it saves. Given that assets and liabilities thereby arise, present goods are exchanged for future goods. Take Robinson and Friday, for example: When Robinson sows grain, he spends the whole day out in the fields, yet, to begin with, has nothing to eat come evening. When Friday catches fish during the day and gives Robinson some in the evening, both of them have something to eat, and Robinson can “pay” Friday later with bread.

Exchanging present for future can benefit both of them in exactly the same way as simultaneous trade can, and can equally be justified by comparative production advantages. This particularly applies if countries have different demographic perspectives or a different level of economic development. If the German savings surplus flows into lucrative investments abroad, growth potential and jobs are created there.

For example, for Germany, demographic change means the following. Today we have a ratio of just under three people of working age to one person over 65, but in 2030 it will only be just over two. In light of this development, it is not a bad idea to exchange some present goods for future goods. And according to internal model-based analyses by the Bundesbank, demographic change has played a relevant role in the German current account surplus since the turn of the millennium. It cannot fully explain it.

In practice, an ageing population will lead to a significant strain on our social security systems and public finances. Making the pension system more sustainable also means paying attention to a fair balance between the generations. US comedian Groucho Marx might have seen that differently. He once said: “Why should I care about future generations? What have they ever done for me?” Nevertheless, we should make sure that none of the four levers of the pension system – the pension level, the contribution rate, the central government grant and the retirement age – is pulled too far. Nor, for that matter, should individual levers be deemed to be inviolable. This applies, not least, to increasing the retirement age.

4 The low interest rate environment

4.1 Distributional effects of monetary policy

Ladies and gentlemen,

Demographic change in Germany and elsewhere boosts savings and, hence, is one reason for the long-term downward trend in the real interest rate in recent decades.[18] Furthermore, the real interest rate was depressed by the central banks in recent years. For the domestic upward price pressures have been and remain – as an after-effect of the crisis – stubbornly low. In order to ensure that inflation returns towards the ECB’s inflation aim over the medium term, monetary policy became extraordinarily accommodative – including by means of non-standard measures such as the asset purchase programme.

I can well understand that many savers are unhappy about the low interest rate environment. And I also take the concerns about potential distributional effects very seriously, particularly regarding the non-standard monetary policy measures. It is feared that the purchase programmes by the central banks pushed up share prices and property prices in particular. This would mainly benefit wealthier households, given that they typically own shares and real estate.

Against this backdrop, the Bundesbank evaluated the relevant literature some time ago.[19] While it is true that research tends to find non-standard monetary policy measures increased wealth inequality in the short term by driving up asset prices, the medium to long-term effects are not completely clear. Research in this field is still at an early stage and should therefore be treated with caution. Yet all in all, it cannot corroborate the hypothesis that accommodative non-standard monetary policy measures heightened inequality.

This is consistent with the Bundesbank’s current study on the development of household wealth in Germany.[20] Looking at the inequality of wealth distribution, no clear trend could be observed between the 2014 and 2017 survey waves. Instead, wealth levels have risen on a broad basis on the back of strong economic growth. Admittedly, this purely descriptive study does not allow any insights into the underlying drivers. However, if the exceptionally accommodative monetary policy stance had strongly widened the gap between wealthy and less wealthy people in Germany, I expect this would have shown up in the overall data.

Furthermore, much like conventional interest rate policy, the non-standard monetary policy measures are more likely to have reduced the income inequality. You see, without the non-standard monetary policy measures, overall economic growth would likely have been weaker, employment would have grown at a slower pace, and unemployment would have decreased more sluggishly. In turn, higher income, which can of course mainly be explained by other factors than monetary policy, allows households to step up their saving efforts without having to limit consumption. This could have been a reason for the growth in relatively small assets in recent years.

Interestingly, the proportion of households unable to save due to a lack of financial resources has decreased by 4 percentage points. This will probably have been one major outcome of the upbeat trend in the labour market. Overall, the proportion of households which regularly save also increased by 4 percentage points from 59% to 63% between 2014 and 2017, whereby concerns about inadequate retirement provisions in a prolonged period of low interest rates could also lead to increased saving efforts.

4.2 Financial stability and banks

In any case, the prolonged period of low interest rates has done nothing to dampen households’ propensity to save. But it’s clear that the accommodative monetary policy is associated with risks and side effects. In the setting of low interest rates, financial market actors in particular might be tempted to take greater risks in search of higher yields. Over time, this approach could cause risks to financial stability to build up.

The financial crisis painfully brought it home to us how quickly problems in the financial system can potentially spill over to the real economy and to inflation developments. Monetary policymakers must not sit idly on the sidelines and watch when financial imbalances are jeopardising price stability. But in this context, monetary policymakers must never lose sight of the objective of price stability in the euro area. Ensuring financial stability is the mandate of macroprudential policy.

In Germany, the increase in wealth between 2014 and 2017 is partly attributable to rising house prices. And property prices climbed sharply in 2018, too. According to our calculations, (based on data from bulwiengesa AG) they increased in cities at a rate of 8½% – a figure comparable to that of previous years.[21] For Germany as a whole, the price increase can largely be explained by demand and supply factors. In cities, according to Bundesbank estimates, prices continued to be between 15% and 30% above the level that would appear justified in terms of longer-term economic and demographic determinants.

With regard to financial stability, increased valuation levels for residential properties are not problematic per se. Far more important is to what extent the financial system would be able cope with abrupt price corrections.

Particularly for smaller and medium-sized banks, financing residential properties represents a significant part of their lending activity. The Bundesbank came to the conclusion in its last Financial Stability Review that credit standards had not been considerably relaxed, but that smaller and medium-sized banks in particular are now facing high exposure to interest rate risk.[22] Many bank customers have used the low interest rates to prolong the interest rate fixation period of their loans for house purchase.

Thus, for banks the gap in the interest rate fixation period between short-term deposits and long-term loans is becoming increasingly wider. An abrupt interest rate rise would immediately drive up their funding costs, but their interest income would increase only gradually.

I am aware that many of you are rather more concerned about the opposite scenario of continued low interest rates. The longer the period of low interest rates persists, the more likely it is to place a burden on banks that – like the majority of you – primarily generate their income from traditional deposit-taking operations. To some extent, the situation is reminiscent of the dangers a deep-sea diver is faced with. If the diver resurfaces too quickly, the sudden loss in pressure can result in decompression sickness. If the diver stays under water for too long, there is a risk of the oxygen supply running out.

The latest stress test conducted by the Bundesbank and BaFin on profitability in a low interest rate setting at small and medium-sized German banks is still ongoing. Yet in recent years it has been evident that the pressure on lending margins is increasing. The net interest income of German banks (in the narrower sense) decreased in 2017 by 7% to €71 billion.[23] And low profitability can also develop into a problem for financial stability.

That said, the sums of money which the banking sector pays in negative interest to the Eurosystem only play a minor role. You see, these payments are small compared to banks’ net interest income. Accordingly, the potential relief of a tiering system, as is currently being discussed, would make itself felt, but the overall impact would be modest. Furthermore, this discussion has delayed expectations about monetary policy normalisation. Taken in isolation, this is likely to place an additional burden on banks, potentially also resulting in a negative net impact.

When it comes to increasing in profitability, this is mainly a challenge that institutions themselves have to meet. A more pressing question from the vantage point of monetary policy is whether the problems which the low interest rate environment is causing for banks are disrupting or even hindering the transmission of policy stimulus.

After all, the mandate of monetary policy is to maintain price stability. Therefore, monetary policymakers must respond to the weak domestic price pressures in the euro area. That said, this also means continuing along the path of monetary policy normalisation when the price outlook allows, and not putting it off unnecessarily.

5 Conclusion

Ladies and gentlemen,

There wasn’t really anything constant about Daniel Defoe’s life. He was intended to become a priest, but instead he started out as an independent merchant and subsequently became a brick manufacturer, journalist, newspaper publisher and writer. He also spent time as a secret agent, political dissident and prison inmate. Nor did he enjoy consistent personal wealth – by Defoe's own account, during his lifetime he became rich and then poor again 13 times.

Maybe it was precisely these ups and downs that shaped his ideas and works and ensured that they would be treasured by subsequent generations. Robinson Crusoe and Defoe’s other fictional heroes aren’t mythical or historical figures, but normal people facing life’s trials and tribulations. Concerns about people’s hardships were also at the heart of Defoe’s savings bank idea.

At the same time, we are reminded of what made Germany’s economic model strong and what can continue to make it strong in future. What is important is not only being a competitive, locally based economy with a strong backbone of medium-sized companies firmly integrated in Europe. Having a broad-based participation in society’s prosperity is of particular importance, and savings banks contribute to this.

 Thank you for your attention.

Footnotes:

1. H. Hofmann (2019), “Robinson Crusoe ist der grösste Überlebenskünstler”, Neue Zürcher Zeitung online dated 12 January 2019, https://www.nzz.ch/gesellschaft/der-erfolgreichste-roman-der-welt-robinson-crusoe-ist-300-jahre-alt-jedem-seinen-robinson-der-groesste-ueberlebenskuenstler-ld.1446391
2. The Economist (2019), Time to worry, 9 February 2019.
3. H. Varian (1996), Intermediate Microeconomics, 4th edition, W. & W. Norton & Company, pp. 522 ff.
4. See S. Goldbach, A. J. Nagengast, E. Steinmüller and G. Wamser (2019), The effect of investing abroad on investment at home: on the role of technology, tax savings, and internal capital markets, Journal of International Economics, Vol. 166, pp. 58-73.
5. See D. H. Autor, D. Dorn and G. H. Hanson (2016), The China shock: learning from labor-market adjustment to large changes in trade, Annual Review of Economics, Vol. 8, pp. 205-240.
6. W. Dauth, S. Findeisen and J. Suedekum (2014), The rise of the East and the Far East: German labor markets and trade integration, Journal of the European Economic Association, December 2014, pp. 1643-1675. 
7. D. Siems (2019), Jeder möchte Deutschland sein, Die Welt, 26 April 2019.
8. See Deutsche Bundesbank (2017), The danger posed to the global economy by protectionist tendencies, Monthly Report, July 2017, pp. 77-91.
9. See Deutsche Bundesbank (2018), The potential global economic impact of the USA-China trade dispute, Monthly Report, November 2018, pp. 11-13.
10. See G. Moin and D. Ponattu (2019), Ökonomische Effekte des EU-Binnenmarktes in Europas Ländern und Regionen, Bertelsmann Stiftung; T. Mayer, V. Vicard and S. Zignago (2018), The cost of non-Europe, CEPII Working Paper; and G. Felbermayr, J. K. Gröschl and I. Heiland (2018), Undoing Europe in a new quantitative trade model, Ifo Working Paper.
11. European Commission (2015), “A Digital Single Market Strategy for Europe – Analysis and Evidence”, SWD(2015) 100 final.
12. G. Gutiérrez and T. Philippon, How EU markets became more competitive than US markets: a study of institutional drift, NBER Working Paper 24700.
13. C. F. Bastiat (1845), Petition of the Manufacturers of Candles, Waxlights, Lamps, Candlelights, Street Lamps, Snuffers, Extinguishers, and the Producers of Oil, Tallow, Resin, Alcohol, and, Generally, of Everything Connected with Lighting, Economic Sophisms – First Series.
14. P. Passell (1994), Economic Watch; Big Trade Deficit With Japan: Some Think It’s No Problem, The New York Times, 15 February 1994.
15. Federal Ministry for Economic Affairs and Energy (2019), Wirtschaftspolitische Probleme der deutschen Leistungsbilanz, Gutachten des Wissenschaftlichen Beirats beim Bundesministerium für Wirtschaft und Energie.
16. Deutsche Bundesbank, The drivers of German net exports from the perspective of a DSGE model, Monthly Report, March 2019, pp. 19-21.
17. Deutsche Bundesbank, On the corporate payout ratio in Germany, Monthly Report, March 2019, pp. 24-27.
18. G. Ferrero, M. Gross and S. Neri (2019), On secular stagnation and low interest rates: Demography matters, International Finance, pp. 1-17.
19. Deutsche Bundesbank, Distributional effects of monetary policy, Monthly Report, September 2016, pp. 13-36.
20. Deutsche Bundesbank, Household wealth and finances in Germany: results of the 2017 survey, Monthly Report, April 2019, pp. 13-42.
21. Deutsche Bundesbank (2019), Housing prices in Germany in 2018, Monthly Report, February 2019, pp. 53-55.
22. Deutsche Bundesbank (2018), Risk situation of the German financial system, Financial Stability Review 2018, pp. 43-58.
23. Deutsche Bundesbank, The performance of German credit institutions in 2017, Monthly Report, September 2018, pp. 29-63.