Many economists and politicians consider the German trade surplus as dangerous for the world economy. During the G20 meeting in Hamburg, the scene was ready for a clash between protectionist America and free-tradings Germany. The US President Donald Trump already withdrew from a trade pact – the Transatlantic Partnership, and has asked to renegotiate another – the North American Free Trade Agreement. He is considering whether to impose an import duty on steel in America, which will almost certainly cause retaliation.
The threat of a trade war hung over the Trump’s presidency in January. In contrast, the German Chancellor and host of the meeting, Angela Merkel, supports the free trade. In a covert attack on Trump, Merkel delivered a speech on June 29, condemning the forces of protectionism and isolationism. The free trade deal between Japan and the European Union (EU) will add content to its rhetoric.
No doubt whose arguments are correct. Trump’s doctrine that trade must be balanced to be fair is economically illiterate. His conviction that duties and taxes will level up the conditions is naive and dangerous: they will reduce prosperity for all.
But at least in one aspect, Trump has grasped an awkward truth. He blames German trade surplus, which last year nearly reached 300 billion USD, which is quite higher than those of Chine – 200 billion USD. The decision it threatens to stop selling German cars may be suicidal, but it is a fact that Germany saves too much and spends very little. The scale of German savings and the persistence of the country’s accumulation make it a dangerous defender of the free trade.
In the basics of the German trade surplus is the prevailing national saving over domestic investment. In the case of Germany, it is not the result of mercantile government policy, as some foreigners complain. Neither, as German representatives often insist, reflects the urgent need for an aging society to save more. For years, the household savings rate has been stable and high. The rise in national savings comes from companies and the government. Emphasizing the German surplus is a decade-long agreement between business and trade unions in favor of wage restraint in order to preserve the competitiveness of the export industries. This moderation serves well the export-led German economy during post-war rebuilding and afterwards. This is an instinct that helps understand Germany’s transformation.
The German model evokes envy with many things. Harmonization between firms and employees is one of the main reasons for the outstanding performance of the economy. The companies could invest without worrying that the unions would hold them hostage. The state played its role by sponsoring the vocational training system, which is just as admirable.
In the United States, the outlook for men without high school education has worsened as job cuts in the industry have declined – a cause of economic nationalism embraced by Trump. Germany did not avoid this entirely, but keep positions. This is one of the reasons why the populist Alternative to Germany remains at the periphery of politics.
However, the negative side effects of this model are becoming more and more obvious. They have made the German economy and global trade unbalanced. The pay cuts mean lower domestic costs and lower imports. Consumer spending is down to 54% of GDP, compared with 69% in the United States and 65% in the UK. The exporters do not invest their extra profits at domestic market. And Germany is not the only one – Sweden, Switzerland, Denmark and the Netherlands are also generating high surpluses.
When a large economy with full employment has a current account surplus of over 8% of GDP, it puts the global trading system under unreasonable pressure. To offset these surpluses and maintain aggregate demand so as to keep jobs, the rest of the world must borrow and spend the same amount. In some countries, particularly in Italy, Greece and Spain, stubborn deficits eventually led to a crisis. Their subsequent turn to surplus came at a high price. The constantly high savings in northern Europe made this adjustment unnecessarily painful.
In the 1970s and 1980s, Germany’s high propensity for high savings was a stabilizing factor. Now it is a hindrance to global growth and a target for protectionists like Trump.
Perhaps the huge German trade surplus will be reduced, as the Chinese, by the wage increase. The unemployment is under 4% and the working-age population will decline despite large immigration. After decades of decline, house prices have risen, meaning that wages do not cover them as well as they did in the past. Institutions behind wage restrictions lose influence. But the German instinct of caution is deeply rooted. Last year, wages grew by only 2.3%, which is less than in the previous two years. If a correction begins, the surplus will take many years to fall to a reasonable level.
The government needs to help by spending more. The German structural budget balance changed from a deficit above 3% of GDP in 2010 to a small surplus. Officials call it caution, but this is hard to defend given the high savings in the private sector.
Germany has a number of important projects to spend money on. Schools and its roads are ruining because of the pressure on public investment needed to stick to its own wrong fiscal rules. The economy is lagging behind its digitization, taking 25th place in the world at an average download speed. Providing more out-of-school care by the state would allow more mothers to work full-time in this economy where women’s participation is low.
Some believe that due to full employment, such expansion is impossible. In a market economy, however, there is a tried and tested way to apply for scarce resources: pay more.
Above all, it is high time for Germany to admit that its excessive stamina is a weakness. Merkel is absolutely right to proclaim the message of free trade, but she and her compatriots must understand that the German trade surplus is in itself a threat to the legitimacy of free trade.