International Investments and Current Account Imbalances: The Importance of Valuation Changes
Björn Bremer and
No 117, DIW Roundup: Politik im Fokus from DIW Berlin, German Institute for Economic Research
Global capital flows have strongly increased from the 1980s until the outbreak of the financial crisis. As a result of this development, Germany's foreign investment has risen to around 250 percent of gross domestic product while foreign investments in Germany have increased to about 200 percent of Germany’s gross domestic product. This positive difference between Germany’s assets and liabilities is a result of the country’s continuous current account surpluses, which represent net financial flows – the difference between outflows and inflows. Investments abroad offer investors the opportunity to diversify their savings and possibly generate higher returns than in Germany. In return, however, foreign investment also entails risks; fluctuations in price and exchange rates can lead to high losses. Potential value fluctuations on international investments are relevant for Germany. German policy advisors controversially discuss whether additional investment in domestic infrastructure or research and development would yield higher and less volatile returns than some of Germany’s foreign investments.
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