(BBG) But getting a country of savers to start spending is easier said than done.
Germany’s gigantic trade surpluses are a problem. Almost everybody — including lots of Germans — agrees on that. But when President Donald Trump decries the U.S. trade deficit with Germany, as he did this morning on Twitter, and declares that “This will change,” it does raise an important question: How can it be changed?
As is apparent from the above chart, Germany’s current account surplus (trade plus income flows) has kept growing even as the two nations perhaps most famous for their surpluses — China and Japan — have seen theirs shrink. In 2016, Germany’s current account surplus blew past China’s in absolute terms ($297 billion to $196 billion), even though China’s economy is three times bigger.
Germany’s bilateral trade surplus with the U.S. has grown a lot too over the course of the current economic recovery, although it has shrunk a bit since 2015.
First of all, as an economic journalist, I am required by law 1 to state here that bilateral trade deficits like the one the U.S. runs with Germany are not in and of themselves bad. I run a yawning bilateral trade deficit with my local grocery store, and that’s OK as long as I have enough income from other sources to make up the gap. When countries run chronic overall current account surpluses or deficits, though, there can be problems. As former Federal Reserve chairman Ben Bernanke put it in 2015:
The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.
Big trade imbalances can also lead to unhealthy and unsustainable financial flows, as happened with the U.S. and China in the lead-up to the 2008 financial crisis.
So yes, Germany’s huge trade surpluses are a problem. On that we can (almost) all agree. What’s causing them? The president, who is very big on the word “deal,” offered this diagnosis in March:
Germany has done very well in its trade deals with the U.S., and I give them credit for it.
Here’s a fun fact: Germany has no trade deals with the U.S.! All its trade relations are managed through the European Union. And yes, the EU ran a goods trade surplus with the U.S. of $146 billion in 2016. Germany accounted for 44 percent of that, Ireland (where U.S. pharmaceutical companies do a lot of their manufacturing) 24 percent, and Italy 19 percent. Then again, other EU countries such as Belgium, the Netherlands and the U.K. all run trade deficits with the U.S. The EU does impose a lot of tariffs and quotas on imports, but so does the U.S., and these trade barriers are seldom cited as a reason for Germany’s big current account surpluses. Which makes sense, given that so many of them were already in place in the 1990s when Germany ran chronic current account deficits.
So what accounts for Germany’s big shift to surpluses? The two most convincing explanations are (1) the birth of the euro and (2) German frugality.
In the decades after World War II, West German economic policy makers made the strength of the country’s currency a top priority. From 1960 to 1990, the German mark almost quadrupled in value against the U.S. dollar. Since merging the mark with the euro in 1999, though, Germany has had to share its currency with the rest of the euro zone. And since the financial crisis, that currency has been pretty weak — significantly weaker than the German mark would likely be if it were still an independent currency. German Chancellor Angela Merkel said as much in February:
If we still had the deutsche mark, it would be valued differently than the euro is now. But that’s an independent monetary policy over which I as chancellor have zero influence.
That sounds like a cop-out — and it is a cop-out! But it’s also mostly true. Germany’s influence over the trajectory of its currency is now quite limited.
Germany has one of the lowest public-investment rates in the industrialized world. Its municipalities, which are responsible for half of all public investment, currently have unrealized investment projects worth €136 billion, or 4.5% of GDP; Germany’s school buildings alone need another €35 billion for repairs. Meanwhile, private investment in Germany’s aging capital stock has been weakened by many German companies’ desire to invest abroad.
Germany also has a perennially high household savings rate, is currently running big government budget surpluses, and has generally been wary of efforts to expand Europe’s monetary union into a fiscal one in which more burdens are shared across national lines. So the problem with Germany isn’t so much that it is exporting too much but that it is spending too little. I’m doubtful that President Trump can effect much change on that front. But maybe French President Emmanuel Macron can!
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
- Not really.