Germany has been the target of some stinging criticism as of late. The US Treasury and the IMF accused the Germans of running too large trade and current account surpluses. Germany is hence fuelling huge global imbalances, as these surpluses must by definition lead to equivalent deficits elsewhere. Is there any merit to this argument?
Berlin – TV Tower / Fernsehturm on foggy day
The US argument is easy to follow. Germany’s economy is extremely dependent on exports. That does not necessarily have to be a problem, as equivalent imports could offset this. However, they don’t. Germany’s exports accounted for 52% of GDP in 2012 (compare that to China’s 31%, France’s 27% and Spain’s 32%). Germany’s imports of goods and services account for 46% of GDP (vs. China’s 27%, France’s 30% and Spain’s 31%).
The resulting 6% trade surplus matters significantly, especially given Germany’s size as the Eurozone’s largest economy. Usually, Germany and China take turns as the world’s biggest absolute exporter, which is even more impressive given the German economy’s smaller size (less than half that of China by most measures).
The reason for this trade surplus is quite clear: Germany’s export sector is extremely competitive, its engineering prowess revered around the world. Hence the Germans’ argument: It cannot be our fault that we are so good at what we’re doing. The solution to us stuffing the world with our machines is other countries producing better things so we import more of them, thus closing the trade gap.
In the past the adjustment mechanism came through the flexible Deutschmark. Its value would go up, German exports become less competitive and imports cheaper. This would at least in theory keep a lid on excessive and persistent trade surpluses. The existence of the Euro has been a boon to German exporters, as it keeps their products’ prices artificially low. The only adjustment mechanism left inside the Eurozone is relative devaluation / deflation.
This explains to a large extent Germany’s policy stance. Structural reforms in “weak” countries should hopefully lead to more competitiveness. Without evil intentions, Germany wants to export its growth model to other countries.
There is a problem with this. The key question is what Germany does with the earnings of more than 6% worth of GDP in trade surplus, visible in the capital account. The balance in 2012 was 7%, i.e. Germany exporting capital to the tune of 7% of GDP, in effect saving and not investing huge piles of money.
The reason appears straightforward: there is not enough to do with these masses of money inside Germany. The country’s gross fixed capital formation, a decent proxy of domestic investment, trails that of the Eurozone ex Germany by on average 2-3 percentage points over the past decade. German companies are preferring to invest abroad. Subdued investments are also one of the reasons for stagnating or falling productivity levels.
Meanwhile, employment levels are up but many of the new jobs were added in the lowly-skilled, non-permanent space. The job miracle is often a job mirage. Social mobility is chronically poor in international comparison, mainly due to a bifurcated education system. And while consumption and wages did grow over the past boom years, this growth needs to outstrip export growth and GDP growth for many consecutive years respectively to achieve something in the line of rebalancing.
In the meanwhile, acting hurt and playing deaf does not do the German position any good. A meaningful debate needs to take place at home, especially when long-term growth projections have hardly ever been more dire, mainly a result of poor demographics, productivity decreases and a raft of domestic issues.
The answer to these structural external imbalances is not necessarily only a new wave of deregulation in the service sector. (Higher) minimum wages and less taxes for low to middle income groups could also be part of the same reform package. At any rate, the new grand coalition under chancellor Merkel has plenty of work to do.
Complaining about the US Treasury and the IMF for their rightful criticism is barking up the wrong tree. Germany has serious domestic issues. The fact that it is exporting its savings on such a scale is making the world suffer from them too.