Why Germany’s current-account surplus is bad for the world economy

[Mittens]

I've been looking for an article like this for quite a while. This basically sums up most of my thoughts when it comes to the Euro and Northern Europe/Germany problem. I don't think our German friends will like it though.

Why Germany’s current-account surplus is bad for the world economy


https://www.economist.com/news/leade...nt-surplus-bad

THE battle-lines are drawn. When the world’s big trading nations convene this week at a G20 summit in Hamburg, the stage is set for a clash between a protectionist America and a free-trading Germany.

President Donald Trump has already pulled out of one trade pact, the Trans-Pacific Partnership, and demanded the renegotiation of another, the North American Free-Trade Agreement. He is weighing whether to impose tariffs on steel imports into America, a move that would almost certainly provoke retaliation. The threat of a trade war has hung over the Trump presidency since January. In contrast, Angela Merkel, Germany’s chancellor and the summit’s host, will bang the drum for free trade. In a thinly veiled attack on Mr Trump, she delivered a speech on June 29th condemning the forces of protectionism and isolationism. An imminent free-trade deal between Japan and the European Union will add substance to her rhetoric (see article).

There is no question who has the better of this argument. Mr Trump’s doctrine that trade must be balanced to be fair is economically illiterate. His belief that tariffs will level the playing field is naive and dangerous: they would shrink prosperity for all. But in one respect, at least, Mr Trump has grasped an inconvenient truth. He has admonished Germany for its trade surplus, which stood at almost $300bn last year, the world’s largest (China’s hoard was a mere $200bn). His threatened solution—to put a stop to sales of German cars—may be self-defeating, but the fact is that Germany saves too much and spends too little. And the size and persistence of Germany’s savings hoard makes it an awkward defender of free trade.

Imperfect harmony

At bottom, a trade surplus is an excess of national saving over domestic investment. In Germany’s case, this is not the result of a mercantilist government policy, as some foreigners complain. Nor, as German officials often insist, does it reflect the urgent need for an ageing society to save more. The rate of household saving has been stable, if high, for years; the increase in national saving has come from firms and the government.

Underlying Germany’s surplus is a decades-old accord between business and unions in favour of wage restraint to keep export industries competitive (see article). Such moderation served Germany’s export-led economy well through its postwar recovery and beyond. It is an instinct that helps explain Germany’s transformation since the late 1990s from Europe’s sick man to today’s muscle-bound champion.
There is much to envy in Germany’s model. Harmony between firms and workers has been one of the main reasons for the economy’s outperformance. Firms could invest free from the worry that unions would hold them to ransom. The state played its part by sponsoring a system of vocational training that is rightly admired. In America the prospects for men without college degrees have worsened along with a decline in manufacturing jobs—a cause of the economic nationalism espoused by Mr Trump. Germany has not entirely escaped this, but it has held on to more of the sorts of blue-collar jobs that America grieves for. This is one reason why the populist AfD party remains on the fringes of German politics.

But the adverse side-effects of the model are increasingly evident. It has left the German economy and global trade perilously unbalanced. Pay restraint means less domestic spending and fewer imports. Consumer spending has dropped to just 54% of GDP, compared with 69% in America and 65% in Britain. Exporters do not invest their windfall profits at home. And Germany is not alone; Sweden, Switzerland, Denmark and the Netherlands have been piling up big surpluses, too.

For a large economy at full employment to run a current-account surplus in excess of 8% of GDP puts unreasonable strain on the global trading system. To offset such surpluses and sustain enough aggregate demand to keep people in work, the rest of the world must borrow and spend with equal abandon. In some countries, notably Italy, Greece and Spain, persistent deficits eventually led to crises. Their subsequent shift towards surplus came at a heavy cost. The enduring savings glut in northern Europe has made the adjustment needlessly painful. In the high-inflation 1970s and 1980s Germany’s penchant for high saving was a stabilising force. Now it is a drag on global growth and a target for protectionists such as Mr Trump.

The shift from thrift

Can the problem be fixed? Perhaps Germany’s bumper trade surplus will be eroded as China’s was, by a surge in wages. Unemployment is below 4% and the working-age population will shrink, despite strong immigration. After decades of decline, the cost of housing is rising, meaning that pay does not stretch as far as it used to. The institutions behind wage restraint are losing influence. The euro may surge. Yet the German instinct for caution is deeply rooted. Pay rose by just 2.3% last year, more slowly than in the previous two years. Left to adjust, the surplus might take many years to fall to a sensible level.

The government should help by spending more. Germany’s structural budget balance has gone from a deficit of over 3% of GDP in 2010 to a small surplus. Officials call this prudence but, given high private-sector savings, it is hard to defend. Germany has plenty of worthwhile projects to spend money on. Its school buildings and roads are crumbling, because of the squeeze on public investment required to meet its own misguided fiscal rules. The economy lags behind in its readiness for digitalisation, ranking 25th in the world in average download speeds. Greater provision of after-school care by the state would let more mothers work full-time, in an economy where women’s participation is low. Some say such expansion is impossible, because of full employment. Yet in a market economy, there is a tried and trusted way to bid for scarce resources: pay more.

Above all, it is long past time for Germany to recognise that its excessive saving is a weakness. Mrs Merkel is absolutely right to proclaim the message of free trade. But she and her compatriots need to understand that Germany’s surpluses are themselves a threat to free trade’s legitimacy.

[primalmatter]

There is a lot to unpack here but this article swings heavily in favor of a globalist idea of free trade. I would take what they are saying with a grain of salt.

[Holofernes]

its easy: the whole world buys german machines, that nobody else can built. American cars? lol. Everyone who can afford a german one, buys a german. Even japanese / korean cars are better made. Tesla? lol. watch their cars. the cant even bend the chassis in a way that if fits together, they have clearances of over 2 cm, in an easy as fuck process as metal folding. Ford is the only american car producer that can do this.


Imagine german government would stop forcing the VERY strong rules for military goods from beeing exportet. German is now nr 9 /10 in the world of military exporting. it would be 3 if the companies were allowed to actually sell their stuff outside of Nato.

its a sign of a poor country if beeing a mother not considered as a full time job. Forcing mothers to work is a sign of a 3rd world country. They can stay home and care for the children if they wish, btw per law this applys to fathers too. One income per family should be enough, if u need to take more than 1 job to support your family, like this glorious analysis suggests, that means you are beeing fucked by the economy.

also this article is full of nonsense. The cost of housing on a decade long decline? Its the opposite. Try to find a small appartment (30 qm) in a big city for under 800 Euro. (ca 1 k dollar /month) . You will be searching very long. 15 years ago, when i started at university, it was easy to get one for 300.

Another thing: for a manufactorer job at for example mercedes or bmw, u need education thats on a level that is comparable to american colleges. Those degrees are worth nothing, american exchange students have no idea compared to germans university students. The bachelor degree is less education and theory then a typical apprenticeship in germany requires, as long as its not landscaping. BMW had to build a school first to train their workforce in their US plants, because US education is very poor, and quality of products was not on the level required.

[Sunseeker]

The neoliberal ideal of "free trade" relies heavily on indebtedness and the concept that so long as Joe owes Sue and Sue owes Bob and Bob owes Frank and Sue and Frank owes Joe and Bob then none of them will come to blows because they all stand to lose from someone else. If one of these people however is running a suplus and is not indebted, they are essentially free to leverage that surplus against another nation to turn mutual indebtedness into servitude.

Germany is highly productive and pretty good at balancing their books. The article is sort of indirectly suggesting Germany ought to perform worse as an economy to make other nations more successful, which by neoliberal thought would make Germany more successful because of their "everyone's a winner" mentality.

[Mittens]

The neoliberal ideal of "free trade" relies heavily on indebtedness and the concept that so long as Joe owes Sue and Sue owes Bob and Bob owes Frank and Sue and Frank owes Joe and Bob then none of them will come to blows because they all stand to lose from someone else. If one of these people however is running a suplus and is not indebted, they are essentially free to leverage that surplus against another nation to turn mutual indebtedness into servitude.

Germany is highly productive and pretty good at balancing their books. The article is sort of indirectly suggesting Germany ought to perform worse as an economy to make other nations more successful, which by neoliberal thought would make Germany more successful because of their "everyone's a winner" mentality.

The article is saying that Germany ought to spend more, their lack of spending doesn't balance other nations books.

And neoliberalism didn't really play a role on how trade is made that was neoclassical thinking which doesn't argue against trade surplus, just prolonged ones since it causes the problems described in the article. Those problems would still happen unless everyone decided to engage in mercantilism and go back to the 19th century and early 20th century.

[Glorious Leader]

The important thing to take away from this is that so called profligate states are ultimately the reason that other states can run surpluses. Double entry book keeping.

[Sunseeker]

The article is saying that Germany ought to spend more, their lack of spending doesn't balance other nations books.

Which is a nice way of saying what I said. They "ought to spend more", well, they can buy things they don't need. They can produce less (which is essentially the same as buying more as they'll being importing things they previously produced) they can make poor purchasing decisions and pay more for the things they already buy, or buy things that break more often and thus spend more in maintenance and replacement.

And neoliberalism didn't really play a role on how trade is made that was neoclassical thinking which doesn't argue against trade surplus, just prolonged ones since it causes the problems described in the article. Those problems would still happen unless everyone decided to engage in mercantilism and went back to the 19th century and early 20th century.

They're arguing Germany ought to spend (or produce less) more in order to essentially subsidize economies that are less productive because the end result is more beneficial to the global economy, which to neoliberals is more important than Germany's individual economy since they believe a better global economy will result in a better individual economy, if that isn't neoliberalism I don't know what is. It's the classis "everyone wins but we have a different definition of winning for everybody".

[Mittens]

Which is a nice way of saying what I said. They "ought to spend more", well, they can buy things they don't need. They can produce less (which is essentially the same as buying more as they'll being importing things they previously produced) they can make poor purchasing decisions and pay more for the things they already buy, or buy things that break more often and thus spend more in maintenance and replacement.

It's a distortion generated by the Euro, Germany's ageing population being frugal and artificial suppression of wages. The issue would probably balance itself if the Euro was gone, but alas its The Economist and ideas like that are pretty rare there.

They're arguing Germany ought to spend (or produce less) more in order to essentially subsidize economies that are less productive because the end result is more beneficial to the global economy, which to neoliberals is more important than Germany's individual economy since they believe a better global economy will result in a better individual economy, if that isn't neoliberalism I don't know what is. It's the classis "everyone wins but we have a different definition of winning for everybody".

Yes and that's neoclassical thinking. Neoliberalism is somewhat similar but not the same.

[Fuiking]

It's a distortion generated by the Euro, Germany's ageing population being frugal and artificial suppression of wages. The issue would probably balance itself if the Euro was gone, but alas its The Economist and ideas like that are pretty rare there.



Yes and that's neoclassical thinking. Neoliberalism is somewhat similar but not the same.

You really hate the Euro and Germany dont you?

[Deleted]

The neoliberal ideal of "free trade" relies heavily on indebtedness and the concept that so long as Joe owes Sue and Sue owes Bob and Bob owes Frank and Sue and Frank owes Joe and Bob then none of them will come to blows because they all stand to lose from someone else. If one of these people however is running a suplus and is not indebted, they are essentially free to leverage that surplus against another nation to turn mutual indebtedness into servitude.

Germany is highly productive and pretty good at balancing their books. The article is sort of indirectly suggesting Germany ought to perform worse as an economy to make other nations more successful, which by neoliberal thought would make Germany more successful because of their "everyone's a winner" mentality.

And here I thought you were a person who'd support neoliberalism. (Why can't people be universally critical instead of cherry pickingly showing their rationality and then blindly dogmatize and have monolithic core beliefs and dont want their world view questioned)

- - - Updated - - -

It's a distortion generated by the Euro, Germany's ageing population being frugal and artificial suppression of wages. The issue would probably balance itself if the Euro was gone, but alas its The Economist and ideas like that are pretty rare there.



Yes and that's neoclassical thinking. Neoliberalism is somewhat similar but not the same.

Well it is true that german wages are like frozen for over a decade and the frugalty is also true, but also that the eurozone enables germany a quasi monopoly on many many products which are only affordable for the other countries due to germans frozen wages. (or which the local markets cant compete against due to germanies said frozen wages)

Die deutsche bank also profitted (or was bailed?) from the greece crisis.

Even without armies and weapons, germany can still fuck other countries over. Nevertheless, german products are second to none in most fields.

[Z-Man]

Just a failed welfare state. Pay it no mind.

[Deleted]

Try to find a small apartment (30 qm) in a big city for under 800 Euro. (ca 1 k dollar /month) . You will be searching very long. 15 years ago, when i started at university, it was easy to get one for 300

Depends on what you mean by "big city" but I have a 95qm city center apartment in Germany that costs 740 Euro a month (including water, heating, trash etc. bills).....

[Cybran]

Central and Eastern Europe needs to diversify away from Germany as soon as possible. German and French decline shouldn't drag us down with them.

[Independent voter]

For every $2 we give to Europe they give us $1 back.

Southern Europe holds the euro low because they are poorer, Germany benefits from this low euro because it makes it's exports artificially cheap.

We need to form a dollar zone with Venezuela and Cuba, to make the dollar worth 1/10th of what it is now.

[Deleted]

They're arguing Germany ought to spend (or produce less) more in order to essentially subsidize economies that are less productive because the end result is more beneficial to the global economy, which to neoliberals is more important than Germany's individual economy since they believe a better global economy will result in a better individual economy, if that isn't neoliberalism I don't know what is. It's the classis "everyone wins but we have a different definition of winning for everybody".

But Germany's economy does have an effect on all countries which use the euro. I've said this many times on this forum but in the current system Germany profits off other countries using euro. Saying they ought to think of others is common sense. But they wouldn't even let Greece implement their own currency back. That's not to say Germany doesn't work hard, or isn't an amazing country. But you can't expect everyone to be Germany. It's literally impossible, because of the size, location, the people, the industrial base etc. The euro needs to go, simple as that. Otherwise you risk permanent stagnation in the mediterraenan countries.

[Raakel]

Nice we are back to Germany being the root of all evil...

Please educate yourself:

Deceased French president Francois Mitterrand in 1989 gave his approval to German unification on condition that then Chancellor Helmut Kohl opened the way for the creation of an only currency in the European Union.

Source: http://en.mercopress.com/2010/09/28/...veal-documents

Guess what, the Germans didn't want the EURO and where forced into it in the unification process. Turns out it backfired to other countries and now you blame us?!

May I suggest you do your homework and get your shit together instead of always pointing fingers at us?

Start with not selling out your own industry and high tech and pay taxes for starters?

[Deleted]

Nice we are back to Germany being the root of all evil...

What Germany does or doesn't do has a big effect in the economies Germany trades with. And has some decisions to make in the future. That's not blaming, or fingerpointing.

[SL1200]

Seems to me the Germans are doing things the better way. Why should we admonish them for that?

[Deleted]

its easy: the whole world buys german machines, that nobody else can built. American cars? lol. Everyone who can afford a german one, buys a german. Even japanese / korean cars are better made. Tesla? lol. watch their cars. the cant even bend the chassis in a way that if fits together, they have clearances of over 2 cm, in an easy as fuck process as metal folding. Ford is the only american car producer that can do this.


Imagine german government would stop forcing the VERY strong rules for military goods from beeing exportet. German is now nr 9 /10 in the world of military exporting. it would be 3 if the companies were allowed to actually sell their stuff outside of Nato.

its a sign of a poor country if beeing a mother not considered as a full time job. Forcing mothers to work is a sign of a 3rd world country. They can stay home and care for the children if they wish, btw per law this applys to fathers too. One income per family should be enough, if u need to take more than 1 job to support your family, like this glorious analysis suggests, that means you are beeing fucked by the economy.

also this article is full of nonsense. The cost of housing on a decade long decline? Its the opposite. Try to find a small appartment (30 qm) in a big city for under 800 Euro. (ca 1 k dollar /month) . You will be searching very long. 15 years ago, when i started at university, it was easy to get one for 300.

Another thing: for a manufactorer job at for example mercedes or bmw, u need education thats on a level that is comparable to american colleges. Those degrees are worth nothing, american exchange students have no idea compared to germans university students. The bachelor degree is less education and theory then a typical apprenticeship in germany requires, as long as its not landscaping. BMW had to build a school first to train their workforce in their US plants, because US education is very poor, and quality of products was not on the level required.

It's quite logic the housing prices have gone up by that much over 15 years, I mean more and more of the youth moves out much sooner than back then, and they generally end up in the city, cities already have quite high demand whilst having quite low supply to deal with it, and even when they try to create additional supply, the properties are rented or sold before they are even completed, which means the supply stays somewhat stagnant and the demand just keeps rising.

If you go in the suburbs, the price changes aren't even remotely as drastic as the city. Over the past decade my house in the suburbs in a top location went up by around 10% annually, now if I look at my apartment in the city in a top location, it went up by around 20-30% annually the past decade, just because it's in a good location where properties rarely hit the market. It's similar in other parts of the city, just not as drastic, but still more drastic than any other property in a suburb.

It's sad to say but if you want to live in the city, and it doesn't really matter what city, you'll always pay more than you would in a suburb, when it comes to the capitals or biggest city of a country, you'd have to be doing quite well financially to get anything with a somewhat good location and enough m².

[Mittens]

You really hate the Euro and Germany dont you?

Just the Euro, Germany is a side part in that.