Is it a problem for Europe and the world that German companies are successful exporters? Much was written about this once again during the IMF spring meetings in Washington. Some international commentators and institutions share this opinion. But not me.
The good news is that the issue is irrelevant for most of our international partners. An overwhelming majority recognizes that Germany doesn’t just export a lot but also imports a lot as well – goods worth around €1 trillion ($1.09 trillion) last year, in fact. Hardly any other economy is as open and as tied into international production chains as ours.
For instance, around a quarter of our exports consist of foreign value, added in the form of imported supplies. In other words, our trading partners also benefit indirectly from the success of German exports. Who would seriously propose dismantling well-established trade chains to the detriment of all countries’ prosperity?
German companies also invest a lot abroad, and that too has an effect on our current-account surplus. In recent years, small and mid-sized companies, as well as large corporations, have significantly expanded their direct investments in other countries. Their main focus has been sales and customer service, as well as developing new markets. Cost savings do not play an overly prominent role. These investments are not just good for German companies. The target countries also benefit in terms of technology transfers and jobs.
Take the United States, for example, where Germany is the fourth-largest foreign investor. It is worth noting that German companies pay the highest wages and salaries among subsidiaries of foreign companies. An American employee of a German company in the United States earns an average of around $90,000, or €82,500, a year. That’s a pretty good average annual income. A total of 672,000 people work for German companies in the United States.
Various analyses show that foreign investments in a target country have a stronger effect on growth than purely domestic investments. This is especially true of our neighboring countries.
It is intellectually weak to claim that the government could do something fundamental against the current account surplus.
Germany has long had a surplus, due to the structure of our economy. Mid-sized companies and large corporations are especially strong in the field of high-quality machinery and plants, for which there is heavy demand in world markets, especially in fast-growing, emerging economies.
However, the surplus was particularly high in the last two years, mainly because of temporary effects like the weak euro and low prices for commodities like oil. These effects are responsible for about two-thirds of the roughly 2-percentage point rise in the trade surplus since 2013. Adjusted for these effects, the German surplus at the end of last year would have been less than 6 percent, instead of just over 8 percent.
This is why I assume the German current account surplus will normalize again. Our current forecasts predict a surplus of about 7 percent next year.
The persistently strong domestic economy also contributes to this. Thanks to record employment and significant wage increases, domestic demand has been the mainstay of the German economy for several years now. We have taken many steps to further strengthen domestic demand (improving underlying conditions for private investment, increasing government investment and introducing a legal minimum wage). I have proposed reducing the tax rate for the next legislative period. This will likely provide additional small impulses. And in the medium term, population aging will also contribute to a reduction in the surplus.
However – and this is also part of the truth – it is intellectually weak to claim the government can make any fundamental changes that would work against the current-account surplus. The European Commission has calculated that even a costly fiscal stimulus of 1 percent of GDP, or around €30 billion, would only reduce our current-account balance by 0.2 percent.
It remains true that the German surplus is the result of market-based processes. Increases in government spending in Germany cannot solve structural problems in other countries. Instead of talking about weakening the strong, we should really be asking ourselves how to strengthen those countries that are not yet strong enough.
This article was originally published in Handelsblatt’s sister publication WirtschaftsWoche.