Experts trade blows over issue of Germany’s record surplus
Most Germans believe other businesses and economies should be more competitive, not that Germany should throttle its booming exports
Press conferences of Germany’s economic advisory council are usually a sober affair. The group’s official German name, the Sachverständigenrat, is such a multi-syllable mouthful that they’re known unofficially as the five wise men – even if one of the men is now a woman.
Their seasonal Berlin appearances involve the five economists handing over a doorstopper report to chancellor Angela Merkel, 502 pages, this week. They exchange a few pleasantries and then hold a press conference where they try to out-do each other with dry, airless analysis.
Not this time. Before the eyes of the delighted Berlin press pack on Wednesday, the five wise men turned into the five bickering men – and woman. The row reached a peak when they were asked about the announcement of a European Commission investigation into whether Germany’s trade surplus breaches the EU stability rulebook.
When one of the council members, Prof Peter Bofinger, called the criticisms of Germany justified, the other four disagreed vigorously. As the cameras rolled, they exchanged arguments about the trade surplus and Germany’s current account surplus. Although not new, it was unusual to hear the arguments debated so vigorously and so publicly in Germany.
Driving the debate is the sheer scale of Germany’s exports over imports: climbing rapidly since 2009, Germany is on course to post a record surplus of €200 billion this year. A long-running argument has taken on a new urgency.
The latest round in this debate was triggered by the US treasury report last month criticising Germany’s over-reliance on exports, its high current-account surplus and weak domestic demand.
Combined, these factors “have hampered rebalancing at a time when many other euro-area countries have been under severe pressure”, the report concluded, with an eye on budget consolidation in the euro zone periphery. “The net result has been a deflationary bias for the euro area, as well as for the world economy.”
A who’s who of international voices has, since then, backed the US: the French president, the Italian prime minister and the president of the International Monetary Fund (IMF), Christine Lagarde, among others.
In 2010, as French finance minister, Lagarde argued that Berlin’s export-driven boom and much-vaunted trade surplus were built on low labour costs that was costing its neighbours dear. As well as imposing deficit limits, surplus countries had a role to play in the currency bloc’s recovery by driving domestic demand, she said, noting that it “takes two to tango”.
Prompt and blunt
The German reaction, as always, is prompt and blunt. The economics ministry said the surplus was “a sign of the competitiveness of the German economy and global demand for quality products from Germany”.
In other words, Germany is the solution, not the problem. It is up to others in Europe to make their economies and companies more competitive as Germany has done, not for Germany to throttle its booming export business.
“To urge Real Madrid to side-line Cristiano Ronaldo would not help Malaga win the European Champions League,” wrote Prof Thomas Straubhaar, economist with Hamburg’s HWWI economist institute, in Die Welt newspaper.
“It would weaken the Spanish soccer league as a whole and would give the teams from other countries a better chance to win the tournament.”
The irony of this week’s news from Brussels is that Germany only has itself to thank for the EU investigation. As a lesson of the euro zone crisis, Berlin, along with other capitals, pushed to hand the commission more differentiated means to flag economic problems before they became an existential threat.
Existing instruments for public debt levels were supplemented with a tool to monitor excessive surpluses. The argument for this was that surpluses can also have a damaging and distorting effect on a currency bloc.
Seeing what this could mean for Germany, however, Berlin officials lobbied successfully for the threshold for a commission probe lifted from an average surplus of 4 per cent to 6 per cent of gross domestic product measured over three years. It is this line Berlin has crossed, triggering the investigation.
The commission will present its results in April and the most extreme outcome is a fine of 0.1 per cent of economic output. In the case of Germany, with €2.6 trillion GDP in 2012, that would be a fine of €2.6 billion.
The news from Brussels prompted a familiar, Pavlovian reaction from German talking heads.
One group says the criticism is motivated by jealously of German success while another says boosting demand and cutting the surplus – for instance through wage increases – would only blunt the competitive edge Germany has spent a decade sharpening up.
“You can’t make Europe stronger by making Germany weaker,” sniped Alexander Dobrindt, general secretary of the CSU, Merkel’s Bavarian allies.
Lining up in the next line of defence were the more vocal of Germany’s economic wise men. “This is the result of the market, in which one shouldn’t directly intervene,” says Prof Volker Wieland of Frankfurt’s Goethe University.
His remarks reflect mainstream economic thinking in Germany that the road to success best functions with ordoliberal rules and supply-side economics. States become leaner and more competitive through wage restraint and cutbacks, not state intervention to stimulate growth. Such state intervention in the market, they warn, is the slippery slope to a planned economy.
“Economics in Germany is dominated by supply-side theorists who think strongly in national terms – to the borders of Germany but not beyond,” said Carsten Schneider, budgetary spokesman for the Social Democratic Party (SPD). “It will take some years yet for younger economists to take over, people who have a more global education and outlook.”
Yet it would be wrong to suggest that German economic thinking is uniform and attitudes to the surplus uniformly positive. As far back as 2005 in his book The Bazaar Economy, the economist Hans-Werner Sinn criticised what he called Germany’s “pathological export boom”.
Now, after years of tit-for-tat squabbles between Germany and its surplus critics, critical German economists hope the European Commission investigation will be a useful platform for airing the arguments in public.
There are already signs that a shift in thinking is under way. Yesterday the best-selling Süddeutsche Zeitung daily suggested that many Germans “deliberately perceive incorrectly” the arguments of their surplus critics.
Now these simplistic German reactions – the others are just jealous of our success, they want us to throttle exports – are being contested by a minority of German economists who do not subscribe to the ordoliberal mainstream.
“I think the criticism from America is correct,” says “wise man” Prof Bofinger, the only Keynesian on the panel. For him, the problem is not just the surplus of exports over imports, but the overall current account balance and how Germany deals with its export earnings.
He says a tradition of hoarding savings – public and private – is no longer in the best interest of Germany or its partners. Rather than being invested abroad, often with negative effects, the money could be put to better use at home.
“I see a need for public investment here; this is what politicians should be using to boost domestic demand,” he adds. “The weakness in [public] investment almost never enters the debate here.”
Berlin taking notice
Recent days have seen indications that after years of criticism, the arguments are finally being taken seriously in Berlin.
The finance ministry has acknowledged there has been an imbalance in Germany’s trade but insists things are normalising again. After years of pay moderation, German salaries are on the rise, a factor which was largely behind economic growth in the first half of this year.
As a result, domestic demand is at its highest level in three years and continues to rise. Economists agree that this is likely to help drive down the surplus from recent peaks. “There are already signs that things are retreating, so the large surplus may well take care of itself,” according to Simon Junker, an economic expert with the DIW institute in Berlin.
He suggests that recommendations from the European Commission on the German surplus are likely to echo demands made for years by his institution and others – greater public investment and a reduction in the tax burden, particularly for lower earners.
“More money in the pockets of lower earners, who have a higher tendency to consume, would be a good thing,” Junker says. “Germany is already on the right path but it can do no harm to have an external corrective to help counter undesirable developments of recent years.” As their lively press conference drew to a close this week in Berlin, Germany’s wise men attempted to restore some decorum to the proceedings. Sensing they are on the defensive over the surplus, the ordoliberal wise men indicated they would not yield without a fight.
They warned the incoming German coalition that it would send the wrong signals with plans for tax increases, a minimum wage and rolling back some of decade-old economic reforms.
“It’s not that we’re exporting too much but the insecurity around investment,” says Prof Weiland of Frankfurt. “The best way to boost private investment is to set aside these fears.”
A world class exporter . . . and a world class saver
Since 1999, Germany has built up an investment gap of 3 per cent of gross domestic product (GDP) compared with the euro zone average, according to a leading economic institute.
Cumulatively this corresponds to roughly €1 trillion not invested, or 40 per cent of Germany’s current gross domestic product, according to Berlin’s DIW institute.
“Germany’s biggest weakness is a lack of investment, it has one of the lowest rates of investment in the world,” says DIW president Prof Marcel Fratzscher. “Relative to economic output in the last 20 years, investment in Germany has plummeted.”
The DIW argues in its analysis that this investment gap has deprived Germany of significant opportunities for growth.
Not just a world-class exporter but also a world-class saver, a considerable amount of German savings are invested around the world. According to the analysis, some €400 billion of the total sum has been lost through bad investments.
The loss of money – on both fronts – has run parallel with a drop in investment from about 20 per cent of GDP in 1999 to just over 17 per cent today.
Investing in Germany rather than abroad would be a win-win situation for the country and its people, the DIW report argues, proposing programmes of public investment.
Infrastructure investment is urgently needed to close a gap of up to €6.5 billion that has opened in recent years, says the DIW.
It also calls for education investment: Germany spends about 5.3 per cent of GDP on education, below the OECD average of 6.2 per cent.
The positive effects of public investment would take time to register, the DIW concludes, but would provide a significant growth impetus around Europe.
“German public budgets are already generating slight surpluses again,” Fratzscher says, “which means that we already have the financial means to be able to make the necessary investments immediately.”