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German Stubbornness: Why Not Finally Relent on the Trade Surplus?

Why are Germans so enamored with their trade surpluses? When will they see it is against their own, well-understood self-interest?

October 3, 2016

Why are Germans so enamored with their trade surpluses? When will they see it is against their own, well-understood self-interest?

Germany will generate the largest current account surplus in the world this year. This year, Germany is exporting almost € 300 billion more goods and services than it imports. That is 10% higher than even China’s surplus.

Moreover, the surplus equals over 9% of Germany’s GDP. China’s surplus, meanwhile, amounts to just 3% of its GDP. (This is largely a function of how much the domestic, non-export economy has grown in China.)

At an annual surplus level of € 300 billion, the balance is as large as the total revenues of two of Germany’s flagship industries — engineering and pharmaceuticals — taken together. This is clearly too much.

So far, this issue is mainly discussed in professional circles. But the debate about Germany’s outperformance on the trade front will move beyond those circles very soon.

At the heart of the debate is the need for my fellow Germans to rethink how they look at economic activity. Most Germans believe that a trade surplus is a sign of distinction, as it demonstrates how competitive German exporters are. But that is at best, half of the story.

How long can this go on?

The good news for Germany is that there are plenty of constructive remedies available, even though some work far less well (such as the suggestion to raise wages more) than others (e.g., cutting taxes and expanding public and private investment).

For now, Germany is experiencing the lull before the storm. Perhaps what is currently happening to some of Germany’s flagship companies in global markets (such as VW and Deutsche Bank) should be seen as alarming signals of what’s to come.

Technical and buried in statistical abstraction as the current account seems, the underlying imbalances can develop an explosive force inside the EU as well as in global markets.

No end in sight?

This current account imbalance has increased dramatically in recent years. Even amidst the 2008 financial crisis — which the German economy passed through with comparatively flying colors, while other economies were quite hard hit. Germany’s surplus was only a little over half the size.

Perhaps the biggest indictment of the de facto German economic strategy of overly relying on exports for economic growth is that it doesn’t just violate the spirit of the eurozone, but its letter.

Violating the Maastricht Treaty

Current account surpluses at such an elevated level run counter to the principles of international cooperation. In the Maastricht Treaty, the EU determined that no member state should have a trade surplus larger than 6% of GDP (which is quite a lot already).

Germany exceeds even that elevated level by 50%. For this, it is rightfully criticized by the EU Commission.

It bears highlighting that no such development was envisaged when the European monetary union was established. At that time, the Federal Republic’s trade accounts did not even show any surplus, the country even had a slight deficit.

This underscores just how much things have gotten out of hand.

The main victims of the German current account surpluses are the partners in the monetary union — as well as the United Kingdom, the United States and the emerging and developing countries. They all have good reason to fight back against the German surpluses.

Little wonder that the U.S. Treasury speaks of a risk to financial stability.

Rethink is in the Germans’ own interest

From an internal German perspective, the problem isn’t just that Germany produces more than it needs itself. As long as that is kept within limits, it is not unreasonable.

It is useful for an economy to accumulate reserves for bad times (as in having claims on other nations for those rainy days).

The problem, however, is that once this surplus becomes too large, then resources are effectively squandered.

Many Germans will argue that the country’s trade surpluses are no gifts or concessions. They are earned the hard way in the marketplace, by billions of individual purchasing decisions.

That is certainly true — but this is still a bad deal for Germany. How so? Because all that German firms (and the country as a whole) receive in exchange for delivering real goods and services to customers abroad is mere monetary claims.

To put it succinctly: German workers work their collective butts off, say, to provide Porsches to other countries, but the only reward they receive in return is paper money.

Of course, Germany’s foreign asset position increases accordingly. It currently amounts to nearly € 1.500 billion.

Trade surplus not a sign of virility

Now ask yourself this: To how much of that money will Germany realistically have recourse when push comes to shove, in times when it may really need the money – receipts from past exports — again?

Not much — and certainly far less that what the current account shows.

Look at this same issue in the context of the public debate in Germany about the eurozone. There, Germans complain that they are so often asked to bail out other countries. They also stand hard and fast against any whiff of a transfer union.

What all these Germans fail to see is that this transfer union already exists, in a de facto manner.

Worse, it hasn’t come about due to some inside deal between the European Commission, the French and Italian governments. No, the people who have established this transfer union is the Germans themselves.

Properly understood, a country maintaining a massive current account surplus effectively gives large loans to other countries on an entirely voluntary basis.

The clearest indication how clueless most Germans are on this is that they are so proud of the trade surplus. They basically see it as a sign of their virility.

What’s a better approach?

Given that maintaining such a gargantuan surplus is certainly not in the Germans’ own interest, how best to reduce it?

The German government demands from other states with good reason that they bring their domestic house in order (by not borrowing so much). But that shoe is also on the other foot, so to speak. Germany, by “virtue” of its trade surplus, lends too much.

What are the domestic reforms needed in the German economy?

In the period before monetary union, the answer was simple. If a country had current account surpluses, its currency appreciated. Exports declined (now costlier) and imports (now less costly) rose.

In a monetary union with a fixed exchange rate, achieving that adjustment process is more difficult. Some recommend that wages in Germany should rise more. However, this would deteriorate competitiveness.

This is not a reasonable solution. One should not try to solve a collective problem by having the better performer adapt to the standards of the lesser one.

If the exports are expected to expand more slowly, and the ultimate aim is for domestic demand in Germany to increase, then domestic investment must be increased. That way, firms can busy themselves in the domestic economy, reducing their international exposure.

Need for public investment

This makes perfect sense. Private business investment in Germany has been too low for years. And public investment needs to be expanded in any case. Germany badly needs better roads, bridges, railways and the like. It also needs more spending on education and research, not least for security.

There is no lack of money. Germany had a surplus in in its public households of 30 billion € (= 1% of GDP) in the last two years.

This budget surplus exists despite all the money the German government pays for the nearly one million refugees that came into the country last year. It simply makes no sense to tax people more than is needed for public expenditures.

Furthermore, an expansion of private consumption would be useful. Currently, there still are many unnecessary impediments in place.

One could, for example, reduce the level of taxation in order to stimulate domestic demand and expand store opening hours on weekends. Who in Germany has not already thought on a rainy Sunday about how useful it would be to use the time to go shopping?


In all likelihood, the required change process to deal with Germany’s humongous current account surplus won’t be launched quickly enough. It is already overdue. Trouble lies ahead within the European monetary union and at the international level.

This creates nervousness and uncertainty in the markets, as volatility rises.


Germany’s current account surplus is domestically and internationally the cause of significant problems.

The fate of some of Germany’s flagship companies in global markets should be seen as alarming signals.

German workers work their collective butts off to export, but the only reward they receive is paper money.

Private business investment in Germany is low. And public investment needs to be expanded in any case.

In the Maastricht Treaty, the EU determined that no member state should have a trade surplus larger than 6% of GDP.

Germans complain that they are often asked to bail out other countries. They fail to see this transfer union already exists.