Germany’s Large Foreign Surpluses Finally Diminish, Meeting Former U.S. Demand
FRANKFURT â After years of stubbornness, Germany is on track to reduce its huge foreign surpluses, a potential boon for trading partners like the United States
For four consecutive years until 2019, Germany recorded the largest current account surplus in the world, making it the largest creditor of other countries and drawing criticism from international officials.
Successive US administrations have called Europe’s largest economy one of the main contributors to global economic imbalances. The International Monetary Fund and the European Union have urged Germany to reduce its growing surplus, with German officials arguing in return that there is little they can do.
Recently, however, Germany’s foreign surpluses have declined in proportion to economic output. Germany’s current account surplus (the current account balance incorporates both the trade balance and other foreign flows, including international investment) is expected to decline to 5.5% of gross domestic product in the year next, the lowest since 2005 and down from a peak of 8.6% in 2015, according to German economic think-tank Ifo.
The decline in Germany’s surplus partly reflects temporary factors, including rising prices for imported energy and massive public spending linked to the pandemic. But German economists and officials say it could persist as the new government, appointed this month, increases public and private investment and raises the national minimum wage from around a quarter to â¬ 12 an hour, this which equates to about $ 13.60. Wage growth is generally expected to accelerate as the country’s workforce shrinks by around four million workers over the next 10 years, forcing companies to raise their wages.
All of this could increase imports to Germany as businesses and households spend more, reducing the trade surplus and the current account surplus, which is essentially a measure of excess savings in the economy. . Germany’s trading partners would benefit, as its foreign surpluses affect global demand.
Economists argue that most Germans would benefit as well.
“By keeping more of what is produced in the national economy and giving it to the people, and not having these huge surpluses, we can have a much higher return than the old model,” Achim said. Truger, one of the five economic experts who advise the German government.
Germany’s surpluses are popular with us as a symbol of industrial strength and global competitiveness. Exporting prowess helped Germany eliminate the mass unemployment of the early 2000s and weather successive crises relatively unscathed.
These surpluses reflect the nation’s propensity to save rather than consume, a mirror image of America’s large trade deficits and low savings. In other words, Germany’s current account surplus means that it is accumulating foreign assets while the US deficit shows that it is borrowing heavily abroad to support its domestic growth.
Many economists say the surplus reflects weak domestic demand rather than strength in exports.
“The problem is not so much that Germany exports too much, but imports too little,” said Marcel Fratzscher, president of DIW, a Berlin think tank.
Klaas Knot, governor of the central bank of the Netherlands – another country with large foreign surpluses – said that “competitiveness is a means to an end because it creates jobs”.
Mr Knot, who sits on the European Central Bank’s rate-setting committee, said in an interview in September: âIf competitiveness leads you to a situation where you are continually accumulating claims on other countries butâ¦ they don’t. can’t honor those claims, so what’s the point of that?
Germany has not always had large external surpluses. It ran current account deficits for much of the 1990s as the government spent heavily on the reunification of East and West Germany. A surplus emerged around the turn of the century when German imports suddenly fell.
This import shock may have been caused by cuts in government spending aimed at complying with EU deficit rules, Mr Truger said. Private incomes and imports never fully recovered.
Surpluses increased sharply over the decade until 2016, driven by higher savings and weak corporate and government investment, according to calculations by Bruegel, a Brussels think tank.
The problem is, German companies haven’t turned their savings into larger business investments, says Truger. “Companies would more or less hoard,” he said. The German government used its savings to repay debt and most of its tax revenues to finance social benefits rather than investments.
These choices have left the nation with poor infrastructure compared to countries like Sweden and the Netherlands, said Sven Giegold, a senior German politician from the Greens recently appointed to the new government’s economy ministry.
As companies saved, German workers saw virtually no improvement in their standard of living in the decade until 2008, even though their productivity grew by almost 1.5% per year, according to an ECB study.
Germany’s international investment position, the difference between the external financial assets and liabilities of its residents, has grown steadily, reaching $ 2.5 trillion last year, the highest of all countries except Japan, according to data from the International Monetary Fund. Some studies suggest that these assets have been poorly invested.
German exports have stalled since 2017, as the era of easy foreign trade gave way to geopolitical tensions and Chinese companies, Germany’s biggest customers, became competitors.
Higher domestic spending could erode Germany’s international competitiveness, helping to rebalance the economy and move it away from its dependence on exports. Higher wages, in particular, could hurt price-sensitive export industries such as meat processing or auto parts manufacturing, said Andreas NÃ¶lke, professor of political science at Goethe University in Frankfurt.
Jobs should be transferred from certain manufacturing sectors to domestic services such as hospitality, education and health. “The problem is the interim period,” NÃ¶lke said.
Nonetheless, the overall economic impact of the rebalancing could be manageable, experts say, especially in light of the investments needed in the transition to green energy.
“Germany will remain a trading power … But Germany will import more,” said Gabriel Felbermayr, president of the Kiel Institute for the World Economy, a think tank. âThe whole situation will be more balanced. “
Write to Tom Fairless at [email protected]
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