Donald Trump is vexed about Germany’s massive trade surplus, especially the cars that Volkswagen AG, BMW AG and Daimler AG export to the United States.
Trump’s right about one thing—Germany’s current account imbalance is an issue. But there’s a less obvious, and potentially more troublesome, kind of German export than cars: money.
It’s a bit daft to fault Germany for selling stuff foreigners choose to buy. But because it doesn’t buy an equal amount of stuff in return, Germany is forced to export its savings, thereby becoming a huge net creditor to the world.
So because its national savings far exceed domestic investment Germany isn’t just the world’s biggest car exporter, it’s also the world’s biggest net exporter of capital.
Given its aging population (and lower growth prospects) it’s not surprising Germany generates surplus savings which it invests in yield-bearing assets to provide retirement income 1
But this approach creates several inherent risks, according to HSBC. 2 Germany’s excess savings could contribute to rising indebtedness and financial instability in countries with large current account deficits (like the U.S. and U.K.). Germany’s savings fixation (which the rest of the euro-zone is increasingly trying to imitate, see the chart below) could hinder the continent’s exit from a prolonged slump. And Germany’s accumulated foreign assets might not deliver the expected returns (though Trump is unlikely to care much about that).
Last year Germany’s 261 billion-euro ($293 billion) current account surplus 3 was mirrored by about 230 billion euros of net capital exports. These outflows were exacerbated by the European Central Bank’s bond buying program, which crushed yields on German bunds and forced the nation’s asset managers to seek a better return elsewhere. (Deutsche Bank has dubbed this trend a “euroglut”). 4
The U.S. was the destination for more than $60 billion of Germany’s capital exports, about half of which was invested in stocks. German money helped push up U.S. equity prices (thereby making Americans richer), paid for new manufacturing plants (creating American jobs) and helped the fund the government budget deficit. 5
From an American perspective, what’s not to like about that? Well, Germany’s savings glut has also driven down equilibrium interest rates and thus made it harder for U.S. pension plans to fund retirement promises (and for the Federal Reserve to normalize policy rates). 6
Meanwhile, even the German government acknowledges that “capital in search of potential investment can contribute to credit booms and/or asset-price bubbles in other countries.”
It should know: prior to 2008, surplus German purchases of mortgage-backed securities helped sustain the U.S. subprime mortgage bubble, causing losses for German banks. Domestic savings also funded wasteful investment in peripheral eurozone economies like Greece and Spain. 7
History doesn’t repeat itself but it often rhymes. In the U.S. the subprime debacle looks on track to be replaced by new consumer credit bubbles in student and auto loans. It’s possible Germany’s surplus savings are helping sustain some of these excesses, too. 8
And while German banks have dramatically scaled back their exposure to the eurozone’s struggling periphery, the central bank hasn’t. Due to the European Central Bank's asset purchase program, the Bundesbank has amassed almost 860 billion euros of claims on the ECB via the so-called Target2 system—about half its accumulated net foreign wealth. For now this feels like just an accounting technicality. But if a national bank in southern Europe opted not to honor its Target2 liabilities to the ECB, German taxpayers could be on the hook for very real losses. 9
So forget autos, Trump should be focus his efforts on getting Germany to lift public and private investment closer to home, which would raise potential growth and make it easier for the ECB to end the monetary experiments that weaken the euro and further entrench Germany’s current account surplus. The German government has promised to lift infrastructure spending but anyone familiar with the country’s crumbling roads and bridges knows it could do more (though to be fair the U.S. is no better in that regard).
But lest Trump is reading and is tempted to reach for his Twitter bully pulpit once again, I’d be remiss not to point out another weakness in the president’s anti-German rhetoric.
Trump called Germany’s decision to welcome hundreds of thousands of refugees from Syria and elsewhere a “catastrophic mistake.” Yet an influx of young migrants is the perfect tonic for Germany’s aging population and paucity of domestic demand (migrants tend to buy stuff and need somewhere to live). If Trump were consistent he’d query Germany’s capital exports and welcome its open borders. But Trump loves money. Refugees? Not so much.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
This shows up as a deficit in the country’s financial account
Janet Henry, HSBC's chief economist, explored the risks of the German, Chinese and Japanese savings glut in a note last year.
According to the Bundesbank
In fairness, Germany's no fan of the ECB bond-buying and blames it for the euro's weakness and the country's current account surplus.
China is a far bigger buyer of US Treasuries, of course.
See these comments by ECB president Mario Draghi on Germany and the eurozone's current account surpluses
For example, the finance arms of German carmakers lend plenty of money to Americans to buy luxury cars which consumers might otherwise struggle to afford. With second-hand car prices deteriorating rapidly, the risk of loan losses is increasing.