How Germany Can Really Show Its Economic Strength

For months now, criticism has been leveled against Germany's trade surpluses. And for months, German policymakers and economists have put up resistance — sometimes even with silly arguments. The fact is, Germans should import more — rather than export less — in order to reduce trade surpluses.

Germany should actually have a genuine self-interest in avoiding high trade surpluses. After all, if they constantly export more than they import, the Germans risk a one-sided dependency on a booming global economy — an uncertain prospect.

Moreover, what's so beneficial about enormous capital outflows and high levels of receivables from debtor countries? The experience of past years has shown that these are not deployed efficiently, but actually contribute to the build-up of financial bubbles.

It is no coincidence that the German banking system was so drastically affected by the financial market crisis — even though there was no real estate bubble to speak of in Germany.

Of course, to some extent, Germany's export surpluses are due to other countries having been sloppy in their economic performance and granting themselves nice pay increases despite being more or less uncompetitive.

The only problem is that Germany also has surpluses with countries that don't reflect this pattern. In France, payroll costs have risen more or less in tandem with productivity figures. Nevertheless, French trade deficits have risen immensely in relation to Germany.

Even the Danes, the Swedes, the Australians, the Austrians and the Swiss buy an astoundingly greater volume of merchandise in Germany than the Germans do. Why, for example, should the Danes lower their wages when the unemployment rate in the country was in the region of 3% in 2008?

But what about the true “sinners”? The more the Greeks, the Spaniards, the Portuguese and the Irish rely on radical streamlining, the more dramatically they will cut back, including on imports.

That is something German companies are currently getting their first taste of. Germany's exports to the four euro crisis countries declined by one-fifth in 2010 compared with 2008. This has resulted in a €13 billion shortfall in export revenues, which equals 0.5% of Germany's GDP.

German exporters have also lost a good €6 billion in trade with the United Kingdom. In boosting their market share, the British are relying strongly on the depreciation of the pound sterling. As a result, German firms now sell 10% less merchandise in the United Kingdom than they did in 2008.

The problem is that the surplus-generating countries are so proud of their exports that, as experience has shown, they are unwilling to contribute to a solution.

The Germans are involuntarily delivering proof of this right now — even though the alternative would be much better for the Germans too, at the end of the day. If they stimulated their own imports at the same time as other countries adjust, this would also contribute to declining deficits for those countries — and lead to a lower surplus for Germany.

There are signs that this is beginning to take place. For example, Poland’s exports to Germany increased by 8.6% in the first three quarters of 2010. Germany now accounts for more than one-quarter of Poland’s exports — a major factor behind the Central European nation’s GDP growth.

To see what might happen otherwise — that is, if the strong (like Germany) don't act cooperatively on the basis of their strength — let's do a little thought experiment: Imagine that all the countries that have trade deficits of at least €2 billion with Germany at present were to reduce these balances — by lowering their imports from Germany accordingly.

This would cause German exports to decline by €240 billion. In pure numbers, this would be tantamount to a collapse in Germany's GDP by one-tenth. That, in turn, would make the crisis to date look like a walk in the park.