Imagine someone who runs a thriving luxury car dealership, yet does the weekly shopping at a no-frills discount store. That pretty much describes the Germans. The global No. 3 exporter is famously thrifty at home, so Germany runs a trade surplus equaling nearly 7 percent of its economy.
Now, imagine telling the Germans that this is bad. That’s what is happening as a growing chorus of international critics warns that Germany’s trade surplus is endangering global growth, and putting Germany’s own future at risk.
On Nov. 5, the European Union threatened to probe Germany’s trade surplus, which since 2007 has exceeded EU guidelines of a maximum 6 percent of gross domestic product. Germany must boost consumption and raise wages “to open the bottlenecks to the growth of domestic demand,” EU Economic and Monetary Affairs Commissioner Olli Rehn said.
Rehn’s comments follow recent criticism from the International Monetary Fund, which says German export policy is hindering Europe’s economic recovery. A “significantly smaller current account [surplus] would be useful,” David Lipton, the IMF’s first deputy managing director, said in Berlin last week.
The U.S. has weighed in, too, with a recent Treasury Department report (PDF) warning that German policies were placing “severe pressure” on troubled European economies and creating “deflationary bias for the euro area, as well as for the world economy.”
Not surprisingly, the Germans are furious. Trade surpluses “are a sign of the competitiveness of the German economy and global demand for quality products from Germany,” the country’s Economy Ministry said on Oct. 31. “There are no imbalances in Germany which require a correction of our growth-friendly economic and fiscal policy,” spokesman Martin Kotthaus told reporters in Berlin. An article in the magazine Spiegel lays out Germany’s arguments in favor of its policies. Among them: German companies such as Volkswagen and BMW have created thousands of jobs in other countries where they operate factories. And German manufacturers buy raw materials and parts from other countries, giving their economies a boost.
The critics, though, aren’t really asking Germany to export less—although that certainly would help such EU trading partners as Spain and Italy, which are struggling to export more of their own goods. The Germans are mainly being asked to spend more money on themselves. Over the past decade, Germany has dramatically lowered labor costs and reduced unemployment by creating a large number of low-wage and part-time jobs.
“Germany now has the highest proportion of low-wage workers relative to the national median income in Western Europe,” Adam Posen, president of the Peterson Institute for International Economics, writes in a recent commentary. That helps Germany compete against the likes of China—but it also means that the Germans aren’t buying much from European neighbors struggling to get their economies back on track.
The situation hurts the Germans as much as their neighbors, Posen contends. Over the past decade, fixed investment has fallen steadily as a proportion of the German economy. Spending on public infrastructure, education, and research and development compares poorly with other major economies. Productivity growth has been low. Dependence on exports “has deprived Germany’s workers of what they have earned, and should be able to save and spend,” Posen writes. “Most importantly, this means they move down the value chain in relative terms, not up.”