Germany faces an unprecedented level of criticism from the US president for its trade surplus. Being called “very bad on trade” is counter-intuitive for most Germans. They take almost as much pride in the title of “world export champion” as they do in being world football champion. For many, the trade surplus reflects not only the quality of German products but also having made the right decisions to reform the labor market and not to indulge in excessive wage growth, consumption or idleness. Hence, what seems to be a mercantilist obsession also reflects cultural traits towards saving and working that are unlikely to change easily and are thus important to understand.
Intuitively, German households agree with Finance Minister Wolfgang Schäuble’s desire not to increase spending or to cut taxes significantly, despite the extraordinary tax revenues of the past years. There may be good economic reasons for a “black zero,” as the balanced budget is known, and against debt-financed consumption. However, ethical and cultural factors also play a role in Germany. Surpluses are perceived as good, deficits are seen as bad. Many Germans would also agree with Mr. Schäuble’s recent statement that Martin Luther most probably would have liked the “black zero.”
Saving (“Sparen”) in German has a positive connotation in the normative sense. It is a virtue, as people save by foregoing consumption.
Small linguistic differences testify to this: the German words “Schuld” and “Schulden” are much more similar and heavy than the English equivalents “guilt” and “debt,” or “trespass” that is used in The Lord’s Prayer; where German also emphasizes “Schuld” and “Schuldigen.” By contrast, “saving” (“Sparen”) in German has a positive connotation in the normative sense. Saving is more than an economic quantity or the difference between income and expenditure. It is a virtue, as people save by foregoing consumption. If this is not promoted by the state, it must at least be rewarded by the market.
Negative deposit interest rates, as the European Central Bank has imposed on euro-zone banks, fly in the face of Germans’ sense of justice. Small wonder it soon acquired the pejorative label “penalty rate.” German populists exploit this when criticizing the ECB, even though they should realize that central banks neither punish nor reward. They try to balance the economy by reducing key interest rates when they want to boost investments and consumption. Such incentives meet with little response in Germany. Their private consumption, imports and wage growth remain below levels that would support an inflation rate compatible with the ECB’s inflation aim – prolonging the much-criticized low interest period. No surprise that German is also the only language that knows the expression “Angst”-Sparen.
Households in the German-speaking part of Switzerland are more likely to save than similar households in the French-speaking part.
Interestingly, the strong propensity to save of German-speaking households does not stop at the border. A recent working paper by Benjamin Guin of the University of St. Gallen shows that households located in the German-speaking part of Switzerland are more than 11 percentage points more likely to save than similar households in the French-speaking part. Hence, it may not be a coincidence that France’s trade deficit of €57 billion is the lowest and Germany‘s surplus of €257 billion is the highest in the EU. There is little discussion in Germany that any imbalance between savings supply and credit demand on this scale would beat down market interest rates.
At some point, Germans may come to understand that a current account surplus of 8 percent of GDP and resulting foreign assets of now more than €8 trillion, or 2.5 times GDP, are not in their own interests either. It might be true that an aging society needs to fall back on its foreign savings at some point. But in order for this to happen, foreign debtors must run up trade surpluses. Germany knows from Greece’s example how difficult this is both economically and politically. Without a flexible exchange rate to its major trading partners and borrowers, Germany must rely on them discovering “the virtue of thriftiness” themselves. The monetary union lacks other market-based or effective institutional means to force them.
Before the financial crisis, private capital flows financed the current-account deficits of other European countries with Germany; since then, it increasingly has become the role of the public sector, including its central banks. At some point, Germans may realize that the success and the size of their export sector depend on their willingness to extend public money at taxpayers’ risk to its foreign creditors. Economic historians may one day even write about the credit financed “German export bubble” just as they see the pre-2008 Spanish construction sector right now.
President Trump’s complaints about the overabundance of German cars on America’s streets may not make much sense, but neither does Germany’s indifference to its own macro-economic imbalances. It would be helpful for future discussions between the two trading partners to obtain a better understanding of the cultural values of their counterpart – in addition to critically reflecting on their own ones.
To contact the author: email@example.com