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9 February 2017

It Pays to Look Be­yond Ger­many’s Trade Sur­plus

In an article published in the Wall Street Journal on 8 February 2017 deputy finance minister Jens Spahn explains why a strong German economy benefits its international partners, shares his views on economic competitiveness and comments on the German current account surplus.

Washington should recognize that a strong German economy is good for America, too.

The U.S. and Germany, both economic powerhouses, have long been champions of open-market economies, free trade and fair competition, with reputations for having highly innovative economies, numerous world-class companies and top brands. Yet around the world today protectionism, separation and disintegration are on the rise. It is particularly astonishing to hear such voices coming from America, a country that, like Germany, benefits from integration into world markets.

Germany’s current account, in particular, has aroused great anger. The latest estimates put its 2016 surplus at 8.7% of gross domestic product. The U.S. ran a current-account deficit of around 2.5% of GDP, or almost $500 billion, during the same period.

These numbers reveal very little about the true U.S.-Germany relationship, about the two economies’ specializations in different industries and products, their deep integration into global value chains and their reliance on high-quality imports from each other. They give no reasonable guidance for policy action.

Still, calls for political intervention into so-called imbalances are plentiful. Proponents argue that if only Germany increased its government spending, international problems would disappear. This is illusory. As a member of the European Monetary Union, Germany doesn’t have its own currency. It makes little sense to look at Germany’s current account in isolation. Nobody pays attention to California’s current-account balance with China, and rightly so.

The only valid reference in this case is the eurozone balance. There, the current-account surplus was roughly €400 billion ($428.03 billion), or 3.7% of GDP, in 2016. The current-account surplus is a European issue and not just a German one.

A stronger euro would help bring the trade surplus down. The European Central Bank’s monetary stance remains very loose, weakening the euro and bolstering exports on world markets. With unemployment receding and exports growing in many member states, monetary tightening might soon be justified.

Fiscal and economic policies in Germany, meanwhile, are sound and appropriate. They have built the foundation for prosperity and stability. Growth-friendly consolidation puts a special focus on the quality of public budgets. Public investment is growing and all levels of government contribute to this positive trend.

Germany’s favorable business environment, with a skilled labor force, strong property rights and law enforcement promote confidence in consumers, companies and investors. As a result, the real economy is prospering, with record-high employment and rising wages. Domestic demand continues to be the main driver of robust growth in the country.

Yet there are still calls for more fiscal stimulus in Germany. More public spending, the story goes, would stimulate German imports, so that other countries could export more. But in truth the spillovers would be tiny. This is an intuitive result: How many U.S.-made Boeing jets, pickup trucks or software programs are needed to repair a bridge over the Rhine, or build a school in Berlin?

Public works and education are essential to Germany’s future and the government is strengthening its investment in these areas accordingly. But it isn’t only about money; planning capacities, efficiency and needs must also be taken into account.

A strong German economy benefits its international partners. Germany is not only the third-largest global exporter but also the third-largest importer. Trade linkages are especially strong with partner economies that are well-integrated into international value chains, have strong industries of their own and enjoy a positive business climate.

The U.S. has always been a close partner here. Besides trade connections, foreign direct investment gives an economic boost to both capital importing and exporting countries. Foreign companies built with German participation employ approximately 7 million people, 20% of which are located in America.

Germany and the U.S. understood early on that economic competitiveness is central to successful integration into the world market and for reaping the benefits of globalization. Blaming a country that has embraced these tasks and benefits from a highly competitive business environment would be bizarre. Nobody can have an interest in provoking a trade war.

We need to move beyond the current account and broaden our view to the real challenges ahead. Germany and the U.S. should seize any chance to foster their good economic and political relations, and to build on their strengths, especially their open-market economies.

The article was first published in the Wall Street Journal on 8 February 2017.

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