Those Pesky German Trade Surpluses
Why it is in Germany’s own interest to change course.
- The US criticism of Germany’s export practices may well be on target, even from a purely German perspective.
- The German business model: sending quality manufactured goods in exchange for accepting underperforming loans.
- Manufacturing excellence that converts itself in toxic finance is a dangerous combination for Germany.
- Germans won’t end up with well-performing assets over the long term as compensation.
- Germans evidently have a particular strength in the manufacturing economy internationally.
- Germans suffer from a weakness in creating and managing their international financial assets.
- Weakening Germany’s competitive position helps China, Japan, Korea and the US -- not the euro crisis countries.
- The US Treasury claims to help euro crisis states, in trying to get market share from Germany for US producers.
This time, it is the United States that is criticizing Germany for its current account surplus, hovering at nearly 7% of GDP. In the past, it was mostly other European countries, notably France, which have expressed strong criticism of Germany on this issue.
The typical German reaction has been to dismiss these comments as predictable gripes by underperformers in the global economy.
But could they be justified after all? Paradoxically, could responding to them in the manner desired by the U.S. government be advantageous to us Germans?
Let’s have a look at the facts:
For many years, Germany has exported more than it imported, running a trade surplus. Given that we have not yet included Mars as a market, by definition this means that other countries have to run a trade deficit.
Financial balances mirror these trade balances: The surplus countries, in effect, give credit to the deficit countries. The bottom line is simple: Germany gives its customers a credit to buy the machines and cars it exports.
Proponents of the German policy point to the fact that an aging society should save for the future and that these surpluses will be needed once Germans retire. For that general idea to work well, Germany would have to be as good in importing receivables from other countries as it is in exporting goods to them.
After all, there is nothing wrong with extending a loan to another country, providing that financial asset will perform well over time. Unfortunately, the financial performance of those loans yields a disturbing result: Wherever it was possible to give out loans that ended up being in trouble (i.e., making bad investments), German banks were first in line.
Without a change, we know what happens next. Just think of the U.S. subprime mortgage market or Irish real estate.
In other words, while Germans evidently have a particular strength in the manufacturing economy internationally, they suffer from a corresponding weakness in managing their international financial assets.
That is a dangerous combination: Manufacturing excellence that converts itself into toxic finance means that Germans won’t end up with well-performing assets over the long term as compensation. The German business model seems to be sending outstanding manufactured goods in exchange for accepting underperforming loans.
That is tantamount to a case of playing Robin Hood on oneself – the people being robbed are the Germans themselves. They produce valuable assets, which they can sell at good prices, which are then effectively often converted into doubtful loans. That is a poor business model.
Are the proposed U.S. solutions on target?
The proposal on how to fix the export problem seems to be rather naïve: Germany should lower taxes, increase the government deficit and raise wages in order to import more and export less.
Raising the public deficit does not seem to be the right strategy for a country with 80% of GDP official debt, as well as more than 400% hidden liabilities for pensions and health care and a shrinking population.
Increasing wages will lead to more imports into Germany. But it is reasonable to assume that it will mainly be China and Korea – and, thanks to the lower yen, even Japan – that would benefit from more import demand from Germany.
That finding, though, won’t hold for much of the periphery of Europe. The reason is simple: Even business leaders from those countries state that they have few hopes in that regard. Their view is that they have nothing the Germans really would like to import.
Although this is too negative a view, it is clear that the main beneficiaries of more import demand from Germany will not necessarily be its European partners.
Increased wages would undermine Germany`s cost competitiveness in the world. This might be a reasonable price to pay — if it indeed helped the crisis countries in Europe.
But again, global market realities are different: Machinery, equipment and cars produced by German industry are in high demand. However, in these fields German industry is not so much competing with other European countries as it is with Japan, China, Korea and the United States.
If Germany thus were to follow the U.S. Treasury’s policy advice, Germany would be faced with a true dilemma: weakening the country’s competitive position is helpful for China, Japan, Korea and the United States — not for the European crisis countries.
Thus, the evident consequence of the U.S. Treasury’s position is to pretend to do something that favors the European crisis countries, while really trying to take away market share from Germany to the benefit of U.S. producers. That is misleading at best.
Reducing Germany’s export power could even be a net negative for quite a few countries in the European periphery, as they serve as subcontractors to German export production.
Things can’t stay the same
For all the flaws in the argument presented by the U.S. side, Germany cannot continue as it does. There is no benefit from having trade surpluses if your debtors do not pay back their loans — or if you have to join a fiscal union effectively wiring the money back to pay for the exports you made.
Germany thus needs to adjust its economic policy mix. Not because other countries ask us to do so — but because it is in our own self-interest.
We should invest our savings in a better way: in Germany itself. Both the public and the corporate sector are not investing enough in Germany.
To bring about this transition, we should consider changing the taxation regime to encourage investing. After all, what is the possible logic for low corporate tax rates if companies mostly use it to boost their cash position, increase dividends and share buybacks — but do not invest?
Theoretically, companies might go somewhere else, but we see the same phenomenon of low investments and high public debt/deficits nearly everywhere else as well. That means investing in other countries is not necessarily an alternative.
The only logical conclusion is to have more domestic demand — but it cannot (only) be in the form of more consumption. We need more investment — and this must come from corporations and the government.
But the funds for that can only come from the corporate sector. Private households need to save, given aging. Meanwhile, the government is already highly indebted.
Thus, it is ill-advised to ask the government to take on more debt. But German corporations should go for it. In doing so, Germany would create a win-win situation: no criticism from other countries — and a suitable financial foundation for the country’s future.
Ideally, the private sector invests more voluntarily. Failing that, such activity could and should be encouraged through the tax system. And ideally, any increase in public investment is done in the form of public private partnerships (PPP). That is the best way to increase the efficiency and effectiveness of infrastructure investments (just look at the current Berlin Airport disaster).
It is definitely in Germans’ own interest to reduce trade surplus, but not in the way “recommended” by the U.S. Treasury (and now the IMF, under the auspices of David Lipton, a former senior U.S. Treasury official, who is now the IMF’s number two).
Rather, we should do so in a way which benefits us the most: by investing for the future in education, innovation as well as by expanding the (public and private) capital stock.