When Donald Trump complained that there were too many BMWs on American roads, Sigmar Gabriel, Germany’s foreign minister, wasn’t coy with his comeback: If the United States wants Germany to export fewer goods, it could just “make better cars.” That point is moot. But the story of how Germany developed the world’s largest current-account surplus is far more complex than just ‘Made in Germany’ selling well abroad.
The European Commission, the International Monetary Fund and the OECD are just a few of the institutions that have criticised Germany of late for its persistent current-account surplus. In 2016, it reached a record of €270 billion, surpassing even China’s trade surplus. Even most German politicians agree that something has to change – they simply disagree about what that change should be.
Germany didn’t always have surpluses. In the post-war years, West Germany, with much of its physical infrastructure destroyed, focused on investing in its own recovering economy. For decades, it imported roughly as much as it exported. But in the 1980s, West Germany’s economy first got out of whack as exports continued to grow but domestic investment began to decline.
German reunification in 1990 then plunged the country back into a trading deficit: Suddenly the country had to rebuild eastern Germany, left derelict by four decades of communism. Investment in the domestic economy soared and stayed high throughout the 1990s. The result: As late as 2000, Germany still ran deficits with the rest of the world. But three other developments soon began opening up a surplus again.
The first was the introduction of the euro in 1999. Germans don’t always admit it, but the euro has been a boon for their exporters. By fixing exchange rates in Europe, it removed the main lever for bringing an out-of-whack economy back into balance. Before 1999, any competitive advantage German firms built up over other countries would lead to more demand for the deutsche mark, as foreigners exchange their own currency to pay for German imports, thus driving up its value until German goods become less competitive again.
With the euro, however, German surpluses are offset against deficits by other euro countries, and the exchange rate stays lower than it would otherwise be. The easy-money policy of the European Central Bank has been pushing down the value of the euro even more. That may help revive southern European economies, but is not something that Germany needs. Hans-Werner Sinn, a conservative economist, estimates that the euro is undervalued by about a third relative to what Germany’s currency would be without it.
The second development since 2000: Germany has simply done more than other euro countries to keep wages low. Mostly this was the result of typically German consensual agreements between trade unions and corporate bosses in the export sector. But the government also helped with labor-market reforms that created a low-wage sector.
The third development was that German domestic investment, after booming in the 1990s, finally dropped and then stayed low for several years. Recall what a trade surplus is in economic terms: an excess of domestic savings over investment. The extra capital saved, since it’s not invested at home, ends up abroad, where foreigners recycle it to buy German goods.
So what can Germany do to reduce its surpluses? Devaluing its currency is not an option, because it doesn’t even have a currency of its own. Letting wages rise is an option. Workers’ pay is indeed going up, though arguably too slowly, and a minimum wage introduced in 2015 helps too. Higher wages give consumers more money to spend on imports and at the same time make German goods more expensive relative to those of other countries.
The best option is to raise public investment and encourage private investment. This is where foreigners criticize Germany most harshly. At a time when interest rates are near zero, Germany has nonetheless balanced its budget since 2014, instead of upgrading its roads, bridges and broadband lines, for example. And to get firms to invest more at home, Germany should liberalize its service sector and other parts of the economy. Starting a new business is notoriously difficult in Germany: The country ranks 117th on the World Bank’s Doing Business report.
The bad news is that Germany probably can’t do much more than that, because the ultimate cause of its savings being greater than investment is beyond its control. Germany is an aging society, so people are saving in preparation for retirement. At the same time, firms are more reluctant to invest because they expect a smaller and older population in future.
The good news is that at some point those aging Germans will actually retire and begin to draw down their savings, in part to buy imports. In fact, the surpluses may already have peaked. In relative terms, the surplus has actually fallen since 2015, from a peak of 8.6 percent of economic output. Wolfgang Schäuble, the finance minister, expects the surplus to fall further, to 7 percent in 2018. After all, what goes up must eventually come down.
Christopher Cermak is an editor with Handelsblatt Global in Berlin. To contact the author: firstname.lastname@example.org