Germany saves and exports too much and spends too little. That may not sound like a problem, but it might be distorting the world economy. Alex Rankine reports.
Germany saves and exports too much and spends too little. That may not sound like a problem, but it might be distorting the world economy. Alex Rankine reports.
How big is Germany's trade surplus?
It's the largest in the world. Germany's trade surplus widened in May this year to €22bn, up from €20.7bn at the same time last year. Britain, by contrast, ran a £3.1bn trade deficit in May. The country's annual current-account surplus now stands at $300bn, outstripping China's $196bn surplus, which is the world's second largest. As a percentage of GDP, Germany's exporting strength is even more stark: China's current-account surplus represents less than 2% of the country's GDP; Germany's is 8.3% of GDP. There are signs that Germany is also surpassing China as a target for US politicians with an axe to grind on trade. "We have a MASSIVE trade deficit with Germany," US president Donald Trump tweeted in May this year. "Very bad for US. This will change."
Has Germany always run a surplus?
No. The costs of German reunification saw Germany being cast as the "sick man of Europe" in the 1990s, with high unemployment and persistent trade deficits. The two big changes were the adoption of the euro and the "Hartz" labour reforms piloted by the then chancellor, Gerhard Schrder, in the early 2000s (see below).
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The reforms saw Germany regain competitiveness and, coupled with a long-standing tradition of cooperative labour relations and wage restraint, provided the foundations for the country's current exporting strength. Add in high rates of household saving and tight government spending and you have a recipe for a country that sells far more abroad than it buys in return.
Is that a problem?
Many economists, especially those outside Germany, argue that the country's trade surplus amounts to a policy of "beggar-thy-neighbour". Germany's surplus enables it to use spending in other countries to make up for insufficient demand at home, effectively exporting job losses in the process. There is also evidence that persistent trade deficits can trigger unstable financial flows, as happened between the US and China in the years before the 2008 financial crisis. German politicians argue that the country's ageing population necessitates a high level of saving and ask why Germany should be criticised for its own economic success.
Isn't that fair?
Germany's membership of the eurozone complicates matters. The International Monetary Fund (IMF) estimated last year that Germany's real exchange rate is now undervalued by 15%-20%. In essence, if Germany were still using the deutschmark, then a rising currency would have made German exports more expensive and encouraged overseas buyers to shop elsewhere, but because Germany is tied together with southern European economies by the euro, it is able to keep on exporting with a weaker currency.
Other members cannot devalue against Germany as in the past and instead have to pare back their labour costs to try to regain competitiveness, but Germany keeps such a tight rein on its own wage growth that this is difficult to do, creating a "deflationary bias" across the eurozone that hampers growth.
What is to be done?
Germany could encourage the public and private sectors to spend more. Germany has repeatedly rebuffed calls from international institutions such as the IMF to leverage its historically low borrowing costs to fund public investment, preferring instead to run a budget surplus that hit €24bn last year, a post-reunification high. This success has a downside many now complain that the home of the autobahn has surprisingly poor roads. Net public investment has been effectively zero for years and the private sector has also failed to invest in new technologies.
To take one example, German cars currently account for about 80% of the global luxury market, yet its business leaders have begun to fret that developments in electric and self-driving vehicles elsewhere could see it left behind. It is ironic that Germany says it needs higher rates of saving because its population is ageing, but that the public and private sectors both fail to invest adequate funds to ensure its economy will be productive enough to support an older population down the line.
But do the Germans want to fix it?
German policymakers reject criticismof the trade surplus as wrong-headed, with even the opposition Social Democrat Martin Schulz rebuffing French president Emmanuel Macron and others for raising the issue earlier this year. Nevertheless, more and more voices in Germany are calling for higher public investment to prepare for the digital economy and to fix the nation's roads.
Schulz has cautiously promised that surplus revenue will go towards infrastructure spending if he is elected chancellor in September's election, but he trails the incumbent, Angela Merkel, by 13-17 percentage points in recent polls. What policymakers don't do, wage growth just might. There are signs that the German labour market is tightening and wage growth might pick up as a result. Nevertheless, don't expect frugal German households which have one of the highest savings rates in the OECD club of mostly rich countries to loosen their belts any time soon.
The "German jobs miracle"
The Hartz reforms implemented between 2003 and 2005 saw Germany adopt measures to make its labour market more flexible and to encourage the unemployed into work. The changes have been credited with sparking the "German jobs miracle", with 15% more Germans in work than in the late 1990s and an enviably low unemployment rate. When Germany tells other eurozone economies to reform, it has something like Hartz in mind. Yet a paper by economist Christian Odendahl questions this account of Hartz, finding that the total number of hours worked in Germany has barely increased since the end of the 1990s, while the number of low-paid jobs and of Germans at risk of poverty have both spiked during the same period.
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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
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