Dr. Ludger Schuknecht, Chief Economist at the German Finance Ministry
The European Commission has once again criticized Germany for its record trade surplus. German companies are flooding markets with goods while its own shoppers refuse to spend enough on products and services from abroad. Germany exports more than it consumes, to the tune of some 8.7 percent of its GDP, causing unnecessary economic harm to its fellow eurozone countries.
At least, that’s how the story goes. According to Brussels, the German government should correct this imbalance in the eurozone and the global economy by stimulating domestic demand and ramping up public investment. Unfortunately, the Commission’s proposed remedy is just as short-sighted as its diagnosis. The notion that Germany’s economy is one-sided and export-driven couldn’t be further from the truth.
Germany is not only the world’s third-largest exporter but also its third-largest importer. The country trades intensively with neighboring economies that have strong industrial bases, cultivate business-friendly regulatory environments and are well-integrated into international value chains. German direct investment in Europe has helped to secure the jobs of close to 3.5 million people; globally, that figure is about 7 million. At the same time, the German economy is already adjusting in response to growing domestic demand. With a record 44 million people gainfully employed, the German labor market is becoming increasingly tight, and companies and unions, which are free to negotiate wages without government influence, have raised real wages substantially in recent years.
Last year, real wages rose by 1.8 percent, well above productivity growth or the eurozone average. And these wage increases — coupled with strong employment growth — have led to robust domestic demand. In recent years, German exports to the rest of the world — mainly machinery, electronics, automobiles and chemical products —received a strong boost thanks to catch-up demand from Asia and Latin America. The economy also benefited considerably from low oil and commodity prices. But the effects are now gradually slowing or reversing. German public investment has also strongly increased.
Sound fiscal and economic policies have contributed to a prospering economy and enabled the government to significantly step up public investment in infrastructure, research and education. Last year’s 3.5 percent increase in public investment can hardly be topped in an economy operating at full capacity. And yet it’s important to note that repairing bridges in Berlin or building schools in Bremen does not require many imports from Portugal or Greece. Given the hard evidence about the negligible size of any spillover effects from Germany’s fiscal policies, there is no good reason for the Commission to call on Germany to commit to new fiscal stimulus.
We should not confuse our assessment of the health of national economies with imbalances in the currency union. Eurozone economies have made significant progress in rebalancing their current accounts. Structural reforms in countries such as Spain and Ireland have boosted competitiveness and exports, helping to bring the German surplus in relation to the eurozone down by half, to around 2 percent of GDP. Instead, Brussels should focus on the eurozone’s current account surplus as a whole. In 2016, it totaled roughly €400 billion, or 3.7 percent of GDP. The European Central Bank’s current monetary policy remains ultra-loose, and the resulting low exchange rate is bolstering European exports to world markets. The weak euro also keeps European workers’ real incomes low, meaning they can afford fewer foreign-made goods. Because policy reform, innovation and investment appear less urgent, it also creates complacency.
Fortunately, Europe’s economic recovery is making progress: Growth is higher than expected, unemployment is receding and inflation rates are increasing. This should facilitate the gradual winding down of central bank activities, which would, in turn, strengthen the euro. A stronger currency, in turn, would reduce the trade surplus of both the euro area and Germany. To support this process we need policy reforms that boost economic dynamism, such as growth-friendly consolidation, a clean-up of the banking sector and structural reforms.
Of course, the Commission is well-suited to provide country-specific advice on these issues — and Germany is no exception — but Berlin’s options for reducing its current trade surplus without hurting itself and others are limited. It makes little sense to rebuke Germany solely on the basis of its current accounts, especially if the criticism is not supported by other indicators of economic performance. Such assessments will only fuel politicized debate and provide fertile ground for resentment and division, both in Europe and beyond. Brussels’ economic monitoring reports were originally intended to warn against loss of competitiveness — and that should remain their focus. Let’s concentrate on the real challenge: enhancing economic dynamism. Only this will create jobs and balanced growth.
In a previous version of this article the increase in public investment was stated with 6.7 percent, which was the correct figure at the time of the initial publication. The new 3.5 percent figure was issued only after a review of the general government budget results by our Federal Statistical Office. We have updated the figure accordingly and apologize for any inconvenience.