Germany’s Current Account Surplus - Is it bad for the World? | Daily News

Germany’s Current Account Surplus - Is it bad for the World?

The ‘Economist’ of July 9 2017, in a detailed and probing study is critical of Germany’s Current Account Surplus which is generated through her repetitively high export performances.

The internationally reputed news magazine says that though the surplus makes Germany content, it seriously affects some other nations particularly large nations which conduct trade with Germany.

How is it so bad?

Given the present free trade climate in the EU and the U.S besides some other European countries German exports hurt the manufacturers in these countries. Particularly affected is the U.S.

On the other hand, the US is roundly criticized for its apparent likelihood to be protectionist. The U.S. President Donald Trump has been quoted a few times in this regard. He has stated that Germany’s motor vehicle exports damage the US car industry and that employees in the manufacture of cars are losing jobs as a result of German exports to the US.

President Trump has threatened to impose tariffs on steel and steel based products as a counter measure to thwart such imports.

Strangely enough it is the western nations championed by the likes of the U.S. that first ushered the concept and practice of free trade or trade liberalization. This was a key component of globalization that swept the world since the early i980’s.

Apart from being the world’s leading proponent of free trade that Germany is, there are quite a few other nations who were early advocates of the benefits of trade liberalization, who talk now of curbing such liberalization. This would clearly be a protective measure that runs counter to free trade.

Economic advancement of Germany

In delving deep into the German economy, the’ Economist’ refers to her past achievements which contributed to make that nation’s economic miracle a reality. She began her post war resurgence not only through technological skills but also through the national will and urge to save. For long years, Germany’s savings have exceeded her domestic investment.

Yet another contributory factor to her progress is industrial peace. Both these factors have enabled the country to reach a rare plane of all round economic stability.

Besides the above, a continuing accord between trade unions and the private sector have ensured that a state of wage restraint prevailed for decades. The overall aim was to maintain an export competitiveness of German products. These are difficult to achieve conditions rarely found in other countries .In combination they made Germany a haven for industrial harmony which is the envy of many other free trade nations.

As a result firms ventured into industry and invested freely without any worry that trade unions would stand in their way to give undue wage rises in the private sector.

Vocational training

To cite another contributory factor to Gemany’s economic success during the last half century or more is her vocational training of the young on a nationwide basis

This program called dual training which begins at school level enables the continuous output of trained young men in the various vocations. Thus Germanys’ mighty industrial machine has rarely run short of trained staff (on a personal note this writer has had exposure to dual training that Germany provides way back in the 1980’s under U.N auspices )

The flip-side of the coin

However, as the ‘Economist” observes there are serious side effects which are patently evident today of the super efficiency and the mastery of the German economic machine.

The magazine applies a rather newly coined term which is gaining ground in the lexicon of international trade-economic nationalism. The term implies that a nation needs to protect its own economy before protecting free trade.

The term was first used by President Donald Trump who came out with’ much touted America’ first. Could this mean an insular mantra or protectionist ideology that -seems to find favour with the hitherto free trade lobby.

In this context was not Brexit at least a shade of economic nationalism?

Despite all its flaws, economic liberalization had a great impacton the development of nations. We could cite the progress achieved by two Asian giants – China and India in this regard.

China reached the rarified heights of being the second largest economy, as a result of her open economic policies which paved the way for foreign investment and exploitation of China’s vast natural resources.

Instrange contrast to the above,it is the very same freedom of enterprise which brought about Germany’s stupendous growth which todayhas led to her havingexcessive export surpluses. This makes the world trade dangerously unbalanced according to the ‘Economist’

We give below the reasons attributed by the Economist’ to the German trade surpluses.

A) A control of wages which had prevailed in Germany over the decades has led to a decrease in domestic spending and her imports.

B) Consumer spending in Germany is comparatively low and amounts to 54% of her G.D.P. In contrast it is 69% in U.S.A and 65 % in Britain.

C) Domestic Investments- There is little evidence in Germany to show that exporters who earned big profits invest such profits at home

A similar economic position also prevailed in some other European countries which had export surpluses repeatedly.

These countries are Sweden, Switzerland, Denmark and the Netherlands Even during the depression that rocked the rest of the world beginning 2008, they never suffered but had trade surpluses.

Germany which had a current account surplus of 8% has caused a severe strain on the worlds trading system. Such surpluses also forced some of the nations to borrow money and spend it with abandon and this helped Germany to maintain her workforce ,as well as the demand for exports.

The result, a debt trapt to other nations. Particularly affected were Italy, Greece and Spain who suffered a series of economic setbacks,

Remedial measures proposed

How could the problem of severe imbalance of worlds trading system be corrected? It could only happen the same way that China’s surplus trading was eroded by a rapid rise in wages. In case of Germany a shrinkage in employment which is less than 4% of the working age population.

This is despite a rapid rise in immigration which Germany experienced in recent times. Also through increase in the purchase of houses.

The ‘Economist’ cautions that Germany has a long tradition of controlling wages.

Wages rose by a mere 2.3% IN 2016 and that was even a lesser wage rise than in the previous two years.

All this means that German trade surplus may take years to reach a level of decline that would impact on the overall picture of global imbalance of trade.

The possible solutions

The ‘Economist’ in conclusion is of the opinion that the German government could step in to correct the situation.

a) Firstly it could spend more .Its structural budget balance has slightly changed from a G.D.P. deficit of around 3% in 2010 to reach the level of surplus today.

Though this is considered prudent by the concerned German officials, the’Economist’ notes that it cannot be defended.As opposed to this the magazine states that there are plenty of areas within the country that could do with more public investment. Among the examples are:-

b) School buildings which are dilapidated which could be repaired using public funds.

c) Similarly public spending on roads which are reportedly crumbling.(This is due to the control of public spending and misguided fiscal rules)

d) Investment on digitalization in which Germany ranks as low as 25th in the world in relation to download speed

e) Germany also could do with a system of better care of the youngand provide for more on after school life. This would let more mothers work full time. In Germany, the participation of women in work is comparatively low.

Though these are some of the remedial measures suggested domestic expansion is considered almost impossible on account of factors like full employment. Above all, there appears a great need for Germany to realize that far too much savings is a weakness.

All in all, the legitimacy that Chancellor Angela Merkel champions in respect of free trade is threatened to a serious degree by her nation’s recurrent export surpluses.

(The writer is a senior Chamber of Commerce official. He is currently Secretary General of the Business Chamber of Commerce and was one time the Secretary General of the National Chamber of Commerce of Sri Lanka. The article is written in his personal capacity. ( e-mail: [email protected] )

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