Weekly Review

Let's not infantilize Germany's trade surplus


Germany’s trade surplus is huge, the largest in the world. That much is well known. But who should do what, if anything, about it? And is anybody “to blame”? At this point the debate invariably breaks down, with Germans and others, especially “Anglo-Saxons,” talking past each other. These encounters remind me of Longfellow’s metaphor: ships passing in the night, “only a signal shown and a distant voice in the darkness, […] then darkness again and a silence.”

I speak from experience: As a German-American, I am often caught trying to explain Germany to Americans, and America to Germans. As a journalist for 20 years at The Economist, I wrote in that most Anglo-Saxon of media voices. Now I am editor-in-chief of Handelsblatt Global, where our mission is, as I promised you in March, to bring you news analysis that “does not infantilize or caricature the German voice but reflects it in its full and unadulterated breadth and depth.”

Imagine my discomfort, then, when my former journalistic home, The Economist, infantilized and caricatured the German point of view on the cover page of last week’s issue, titled “The German problem.” In a nutshell: the world’s trade deficit with Germany is entirely Germany’s fault, and could the Germans please, and pronto, take care of it for the sake of the world economy? I am familiar with the narrative, for I myself wrote according to its grammar for many years. Many of the individual points are reasonable, and not at all contested by German economists — take a look at the answers by two of the leading ones, in our video below, for instance. It’s the overall twist that is jarring to Germans, for it willfully omits their perspective.

In fairness, and understandably, many Germans then react in the wrong way: by willfully misrepresenting the argument: “What, do you you want us to export less?,” sneered one German panelist at a German-American business conference I moderated recently. It helps Germans like him that a few economically illiterate but important people do seem to think that Germany should export fewer BMWs. I am talking about Donald Trump, of course. But this invites Germans down a well-trodden path of faux reasoning.

Germany’s surpluses, in this defensive narrative, reflect its competitiveness: those world-beating firms churning out cars, pills and machines foreigners are happily volunteering to buy. This confuses surpluses with “strength” and deficits with “weakness”, a mercantilist idea. Unfortunately, even senior German politicians succumb to this confusion. “Instead of talking about weakening the strong, we should really be asking ourselves how to strengthen those countries that are not yet strong enough,” demanded Wolfgang Schäuble, the finance minister, in our pages recently.

This reflex is disingenuous because no serious economist, policy maker or journalist — neither at the IMF nor the European Commission, neither in the OECD nor in the US Treasury Department, and certainly not at The Economist — is asking Germany to export less. These educated critics are instead taking Germany to task for the other side of the equation: importing too little.

And here, unfortunately, the subject gets endlessly complex. The best, most balanced and digestible explanation is still that by our own Chris Cermak. Indeed The Economist’s cover story largely rhymes with his diagnosis of the causes. Those come in two main categories.

The first is the simple observation that Germans buy less than they produce. To use more precise terms, they consume less than they could and possibly should, and therefore save a lot. If they — German households, firms and governments — invested those savings at home, their overall trade balance with the world would still be neutral. But Germans also invest less than they save – or rather, invest the excess in other countries, where that money is used to buy German goods. This diagnosis leads to two questions: Do Germans consume too little and save too much? And do Germans invest too few of their savings at home?

The second diagnostic category looks at the development of German wages. The historical facts here are clear. By the end of the decade following reunification in 1990, Germany was called the “sick man of Europe” by none other than The Economist, because it had become uncompetitive. So Germany reacted. Its government enacted labor-market and welfare reforms that spawned a low-wage sector. And its unions agreed with employers to keep wage growth down, so that German firms would become more competitive. In effect, German production became cheaper relative to production elsewhere. If Germany had still had its own currency, it could have appreciated to counter this change. But Germany already had the euro, which stayed cheaper than a D-mark would have been.

Currently the federal government is slightly in surplus. The Germans find it prudent. The Economist finds it silly and egoistic.

Now examine each category in turn, and compare how The Economist and Germans view it. Start with that huge “savings hoard,” as my former colleagues call it. Germans will tell you they save because they want to retire at some point. Because Germany’s population is aging, this means that for a few more years there will be huge aggregate saving. That — a voluntary and rational decision by free individuals — is the primary reason for the high savings rate. The Economist concedes this point but introduces a twist: “The rate of household saving has been stable, if high, for years; the increase in national saving has come from firms and the government.” Aha, so we should worry about “the increase,” which means turning our gaze to bosses and the finance minister.

The bosses and the ministers will also tell you that they’re saving in expectation of an older, smaller population in future. After all, fewer young people will pay taxes for more old people with more needs. Looking ahead to this demographic shift, the federal and regional governments have even legislated themselves “debt brakes” that constrain their ability to run deficits today. Currently the federal government is slightly in surplus. The Germans find it prudent. The Economist finds it silly and egoistic.

Now proceed to the contiguous question: Are Germans investing too few of their savings at home? Here too the historical facts are clear. Following reunification, Germany had an investment boom, as it gave its formerly communist east the world’s biggest paint job. Eventually investment levels had to drop. For the past few years investment has stayed steady at about 19 percent, which is average in Europe. The Economist concedes this point too, but hides it: “Germany’s rate of domestic investment is not obviously weak by comparison with other countries.”

Nonetheless, there is broad agreement in Germany itself that investment should be higher, especially in the public sector. At this point a lazy litany follows: bridges and roads are “crumbling,” broadband lines are too slow, and so forth. As somebody who drives on roads and flies out of airports in America, Germany and other European countries, I never had the impression that the average bridge in Germany is more crumbly than its equivalent elsewhere. My broadband service is several times faster than what I had in California. But it’s good to invest more. And it’s good to spend more on schools. And — wait for it — everybody including Wolfgang Schäuble agrees!

To see why harping on about this is a red herring you have to grasp the scales involved. Germany’s trade surplus is more than 8 percent of GDP. Germany’s public investment (by the federal, state and municipal governments) is a bit above 2 percent of GDP. Is The Economist suggesting that Germany quintuple its public investment, right now, in order to rebalance the world economy?

The Economist seems to be channeling Keynes in demanding that Germany “pay people to dig holes and then to fill them up.” But investing means spending money in the expectation of return.

This is where it’s good to bring in an educated German perspective. As Jörg Rocholl, head of the ESMT, one of Germany’s leading business schools, cautions in his opinion piece for us, Germans would prefer to “spend wisely,” not just more. The Economist seems to be channeling Keynes in demanding that Germany “pay people to dig holes and then to fill them up.” But investing means spending money in the expectation of return. Germans’ first association when they hear of massive public spending projects today is the “new” Berlin airport that has been under construction since 2006 and was meant to open in 2010; only optimists believe the current plan of opening it in 2019. The point is that erasing a trade deficit equal to 8 percent of GDP with public spending is not credible.

What about the second of the major diagnostic categories, boosting German wages? In recent years, German wages have indeed been increasing, by 2.3 percent last year. Unemployment is below 4 percent, and both individual job hunters and union bosses have a strong hand in negotiations. But wage growth could be faster. As The Economist discovered by asking German unionists, they often prefer haggling for more flexible working hours, longer vacations and more job stability when sitting across from bosses. Shocking. Don’t they know that other people have trade deficits to balance?

So there we are: a magazine proud of its classical liberal heritage laments the voluntary decisions by free agents in an economy where the government, thank God, has only limited room for maneuver. This is the intellectual flaw behind much of today’s criticism of Germany. As Christoph Schmidt, chairman the German Council of Economic Experts, puts it, it fails to recognize “that national economies cannot be managed like large firms.” You can criticize Germany for neglecting big reforms in recent years. You can tell it to open up its calcified service sector. You can tell the government to improve schools. Handelsblatt Global will do that, more ruthlessly and perceptively than any other English-language publication. But don’t infantilize a debate about more than 80 million people making independent decisions.

And anyway, take heart: The surplus will soon shrink, as lots of elderly Germans retire and spend their nest eggs on imports. And then it’s trade deficits as far as the eye can see.


Andreas Kluth is editor in chief of Handelsblatt Global. To contact the author: kluth@handelsblatt.com

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