Germany's Trade Surplus: A Cause for Concern?

Germany has been repeatedly criticized for running large trade surpluses. The European Commission is currently examining whether these surpluses endanger the proper function of the European economic and monetary union. But how could these trade surpluses represent a threat? Critics argue that Germany is impeding the economic recovery of the eurozone by repeatedly calling for reforms in other nations while failing to make its own contribution to resolving the crisis. Highly indebted EU nations have massively reduced their imports, thus shrinking their trade deficits, it is said, yet Germany continues to run high trade surpluses. Accordingly, there have been numerous calls for Germany to stimulate its domestic demand through greater public-sector investment and higher wages. It is argued that would lead Germany to import more and export less, thus helping to stabilize the economies of Europe's crisis-racked nations.

But is this criticism of Germany justified? Closer examination reveals that it is not very convincing. First, it is by no means correct that Germany has sat on the sidelines during the crisis, idly letting others undertake efforts to adjust. Balance of trade data confirm this fact: While Germany's trade surplus has remained large in recent years – in 2007 it measured 195 billion euros, and in 2012 some 188 billion euros – the German export economy has undergone considerable restructuring since 2007.  Germany's trade surplus vis-à-vis other EU states declined sharply between 2007 and 2012, from 173 billion euros to 114 billion euros. In 2007, nearly 65 per cent of German exports went to other EU countries – this figure has fallen to 57 per cent over the last five years. At the same time, the percentage of goods imported by Germany from EU nations has hardly fallen. Thus, Germany has clearly reduced its export surpluses in inner-European trade, thereby helping to stabilize demand in the EU countries particularly impacted by crisis. One could argue that this adjustment has been insufficient. But who should determine the level of domestic demand that is appropriate for Germany? Europe is not a centrally planned economy.

Second, German trade surpluses are not the result of a deliberate economic-policy strategy. Wage restraint in Germany over the past decade has often been criticized as a form of export subsidy. But this policy was necessary to reduce the extremely high unemployment rates the prevailed at the turn of the century. Wage growth is now faster. Furthermore, wages in Germany are predominantly determined by collective bargaining between unions and employer's associations, not by legislators.

Third, a policy of greater domestic investment to counter trade surpluses would be foolish. Investments should be made when the expected returns advise it, and not on the basis of balance of trade data.

Fourth, it is often neglected that for a country strongly impacted by demographic aging, it is an extremely sensible course of action to reduce public debt and invest capital abroad. German export surpluses are a reflection of this foreign investment. This touches upon an important point.  The investment of retirement savings abroad is only a good idea if the investments are sound. In the decade following the introduction of the euro, however, a great deal of money exported by Germany was poorly invested. The ballooning of public and private debts in the eurozone's periphery – financed in part by German investors – was often used to finance consumption or build houses that nobody needed. Now, the money can't be repaid, necessitating multi-billion euro bailouts to prevent the insolvency of governments and banks. Ultimately, German taxpayers have been footing the bill for monies owed to German investors by crisis-racked countries. From an economic perspective, this export strategy is highly irrational. But this does not mean that Germany's export orientation needs to be reduced. What is needed instead is regulatory reform to banks and financial markets in order to prevent excessive indebtedness and encourage sound capital investment. If the EU's examination of German export surpluses leads to this insight, then it will have been worthwhile.

For further information please contact

Prof. Dr. Clemens Fuest, Tel.: 0621/1235-100,  E-mail: fuest@zew.de