Last week, Greg Ip of the Wall Street Journal argued that Germany should focus on raising private wages rather than increasing public investment as part of a broader critique of Germany’s inclusion on the Treasury’s enhanced monitoring list. Ip: “Germany’s problem isn’t the public sector, it’s the private sector: Businesses need to invest more and workers need to earn more, and that can’t simply be fixed with more government spending.”

I have a somewhat different view: more public investment is a key part of the policy package needed to support German wages.

Ip is certainly right to highlight that Germany gained export competitiveness by holding down wage growth during the ‘00s. Wages and prices in Germany rose by a lot less than wages and prices in say Spain from 2000 to 2010, contributing—along with rise in global demand for the kind of high-end mechanical engineering that has long been Germany’s comparative advantage—to the development of Germany’s current account surplus. And that process now needs to run in reverse for Germany’s euro area trade partners to gain competitiveness relative to Germany. See Fransesco Saraceno, or Simon Wren-Lewis.

But the changes in German wages and consumer purchasing power needed to allow Europe to rebalance up, with shifts coming from strong wage and demand growth in Germany rather than weakness in wages and demand elsewhere, will not occur in vacuum.

To state the obvious, for Germany’s substantial external surplus to fall either exports need to fall or imports need to rise.

For Germany’s workers, many of whom work in the export sector, to have the confidence to demand higher wages while exports slump they need confidence that domestic demand growth will be there. Put differently, low nominal (Bunds out to 8 years have a negative rate) and negative real rates only will push up wages if either the private or public sector respond to low rates by borrowing more. The domestic side of Germany’s economy may need to run a bit hot to pull workers out of the export sector.

That isn’t happening now. Wage settlement in Germany was weaker this year than last. Nominal wage growth of around 2% in 2017 in Germany would not create much scope for others in Europe to regain competitiveness without wage deflation.

And there is abundant evidence that Germany needs more public investment. Public investment in Germany has long been lower than the euro area average (under 2 percentage points of GDP, versus say 3 in France). Many of Germany’s roads and bridges—surprisingly to some—could use a makeover. Investment in public capital has not covered depreciation; keeping a high quality stock of public infrastructure means making the investment needed to maintain it.

See the Elekdag and Muir IMF paper, or Hans-Helmut Kotz

“Relative to the early 1990s and in constant prices, capital expenditures are down some 15%. For more than a decade now, they have not sufficed to maintain the capital stock. This is not preparing for the future; it is undermining productivity and well-being. .... crumbling infrastructure (admittedly not as bad as in the US) has become a real issue in Germany.”

Raising public investment is almost a free lunch. The market is paying Germany to borrow, more or less. Public investment creates needed new capital that should raise potential growth, and thus could well improve long-term public finances. And in the current context, there is a good case that public investment would crowd in private investment even as it pulls in imports. What is not to like?

Ip argues that the IMF study showing that a 1 percent a year increase in public investment (when at the zero bound, to be precise) “only” reduces the current account by 0.5 to 0.6 percent of GDP is a reason not to raise public investment. I would argue it the other way. The projected impact on the current account is actually quite large. Most policy changes have a much smaller impact on the external account.* To get a bigger impact that this in a standard model you need a major change in relative prices (e.g. a change in the exchange rate).

And for that matter, if Germany’s current account is too big, real interest rates are negative and private savings far exceeds private investment, why be limited by a percentage point a year increase in public investment for two years as the IMF sort of suggested?

I jest of course; political reality intervenes. Germany’s governing coalition has made the black zero (the schwarze Null) the central goal of economic policy. And since Germany is projected to move from a fiscal surplus of just over half point of GDP to rough balance thanks to spending on migrants, even a 1 percentage point increase in public investment now seems off the table.

But we should be analytically clear: Germany’s commitment to fiscal balance makes it harder to bring its current account deficit down. If a country with a large external deficit was running a large fiscal deficit, would the IMF say that they should not cut their fiscal deficit because it would “only” reduce the current account surplus by 0.5 percentage point of GDP? Certainly not. So why the reluctance to encourage fiscal expansion in a country with a massive external surplus, negative real rates, and a tight fiscal policy relative to its trading partners? The asymmetry Keynes highlighted—there is more pressure on deficit economies than on surplus economies to adjust—is alive and well.

* Consistent with the IMF’s “It is Mostly Fiscal” reputation. the IMF’s global model for the current account has a relatively high coefficient on the fiscal balance, especially after most recent revision to the model raised the coefficient a bit, while things like intervention in the foreign currency market have almost no impact. The IMF generally finds that a 1 percentage point change in the fiscal balance has an impact of between 0.45 and 0.5 percentage points on the current account.