Germany’s Trade Surplus: ‘Not Good!’

The Economist’s cover story this week, on the danger’s of Germany’s trade surplus to the world, is a must read.  Chancellor Angela Merkel, host of last week’s G20 Summit, has carefully cultivated a role for her government as chief foil to the supposedly anti-free-trade crusader President Trump. In response to his calls to protectionism, government ministers in Berlin have relished the chance to portray themselves as standard-bearers for that old neoliberal creed—that free movement of capital and goods has and will continue to produce economic miracles if we all just keep the faith.

But, as the Economist points out, there is the nagging issue of Germany’s persistent trade imbalance, which reached nearly $300bn last year. Their leader points to the origins of this economic phenomenon:

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.

The writers go on to note the dire consequences of this policy, advantageous as it might be for Germany:

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…

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.

Our readers, of course, ought not be surprised that we agree with this assessment: our own WRM has pointed to the merits of some of the criticism leveled at Germany’s trade policy, as well as to the implications of the status quo for the world economy.

This is an important issue, and we urge our readers to pore over the Economist‘s offering, which, in that magazine’s best trademark style, is both approachable and substantive. Especially on this issue, all too frequently signal has been drowned out by the rhetorical noise of simplistic black-and-white narratives. Do read the whole thing.

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