Germany’s huge surplus is beginning to melt

After years of “pretending to be hit”, Germany is on track to reduce its huge surplus – a potential boon for its trading partners such as the United States, writes The Wall Street Journal.

For four consecutive years until 2019, Germany recorded the largest current account surplus in the world, which made it the largest creditor of other countries and provoked criticism.

One after another, US administrations have named Europe’s largest economy one of the biggest culprits in global economic imbalances. The International Monetary Fund and the European Union called on Germany to reduce its surplus, to which Berlin replied that it had nothing to do.

But recently, the surplus has begun to shrink as a share of Germany’s economy. The current account surplus (which includes the trade balance and other flows, including investment) will fall to 5.5 percent of gross domestic product next year – the lowest level since 2005, and from a peak of 8.6 percent in 2015 according to Ifo.

The decline partly reflects temporary factors, including higher imported electricity prices and huge government spending on the pandemic. But German economists believe the trend may continue as the new government increases public and private investment and raises the national minimum wage by about a quarter to € 12 an hour. Wage growth is likely to continue in the future as the labor market shrinks by about 4 million workers over the next decade.

All this can increase imports to Germany, as businesses and households will spend more. Which will reduce the surplus – to the delight of the country’s trading partners, and according to some economists for most Germans.

Germany’s surplus is a popular symbol of global industrial strength and competitiveness. It also reflects the tendency of Germans to save rather than consume – a mirror image of Americans, where there are huge trade deficits and low levels of savings among the population. In other words, Germany’s trade surplus means that the country is accumulating foreign assets.

However, a number of economists say the surplus reflects weak domestic demand rather than strength in exports. In other words, the problem is not that Germany exports too much, but that it imports too little.

Surpluses began to accumulate over the decade to 2016, thanks to high savings and weak corporate and government institutions. And the problem is that the business has not turned savings into investments.

Berlin’s decision not to spend but to cover its debt has left the country’s infrastructure in poor condition.

And while businesses were saving, German workers saw no improvement in their standard of living – despite rising 1.5 percent annual productivity.

Meanwhile, exports are no longer growing so fast – due to geopolitical tensions and the fact that Chinese business – until recently Germany’s largest customer – has begun to become a competitor.

Higher domestic costs could erode Germany’s international competitiveness and help rebalance the economy and reduce its dependence on exports. Higher wages, for example, could hit some export-oriented industries. Which in turn will reduce jobs in the manufacturing sector and ultimately increase those in services.

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