Wednesday, September 9, 2009

World Champion or only No. 1 in Europe?

For decades Germany has been running a trade surplus, which is caused by its strength in exports. But as the diagram below shows, it was only in the last couple of years that the surplus really skyrocketed. Its export strength earned the country the nickname 'export world champion.' However, recently China overtook Germany in this discipline and while some see this as a sign for a loss of competitiveness and relevance, others welcome this development. Germany is being criticized from economists at home and abroad (including some prominent members of the profession in the U.S.) for being partly responsible for the current economic crisis because it was on the other side of the equation of the large global macroeconomic imbalance, together with China and Japan. The huge current account surplus was only possible – so the argument goes – because the United States acted as the consumer of last resort.

There is little talk about these issues during the election campaign that so far has not been about much else than coalition options and the misuse of chauffeur services. But within the ministries, the think tanks, lobbying groups, and in academia, the pros and cons of Germany's export dependency is being hotly debated. And it is probably no surprise that the Germans cannot easily let go of a trophy that many envied them for in the past. To me the question whether and how this export-dependency should be tackled should be thought through thoroughly before the country walks down this path.

The political left in Germany uses this discussion as proof for their general economic concept of higher minimum wages, a general higher wage increase, more social spending, more government investment or in general a politically induced increase of domestic demand. Instead of producing more than we consume, the gap, in their view, shall be closed through government intervention into markets. On the other side of the political spectrum the arguments are less obvious but in my view worthy of consideration for the U.S. critics of Germany's export driven growth model.

Germany's trade is mostly with other members of Euroland. Focusing on Germany's trade statistic with the rest of Euroland is much like looking at California's trade relations with the rest of the U.S. If one takes out the trade with other EU member states, Germany is downgraded from ‘world champion’ to ‘European champion,’ and its remaining current account surplus is insignificant for the rest of the world.

Germany is an aging society. Its population pyramid has for some time lost the shape of a triangle as can be seen below. In only a few years from now the size of the population will dramatically shrink and a smaller share of society will be at an age in which they can productively contribute to produce the GDP. Taking this into consideration, a capital outflow now (the other side of running a current account surplus) is like building a capital stock for the future in which the country as a whole will be less productive. If one follows this argument Germany as a whole acts rationally and a bit like a sovereign wealth fund of an oil-rich nation that will one day in the not too distant future run out of its natural resources.

Even if one does not buy these arguments, the current debate about Germany's export-driven economy will unlikely lead to any political consequences and cause a shift towards the production of more goods and services that are being sold domestically. The virtues of a higher degree of the international division of labor should not be traded in for a balanced current account. If anything the debate will put forward different policy options that try to strengthen domestic demand and therefore increase imports (instead of reducing exports).

Here the election campaign offers two competing parties that were recently very successful in the state elections on August 30. The Left Party can convincingly offer the whole portfolio of policies redistributing income to lower income groups and promises higher government spending on social programs and public investment. In contrast, the FDP has for years repeated its mantra of strengthening the middle class through lower taxes and leaving the most productive part of society a bigger share of their earned income, thereby strengthening domestic demand as well. It will be interesting to see which policy will be put into practice following this month's election.

--Tim Stuchtey

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