October 28, 2015 Thieß Petersen

Germany’s Export Surplus – a Blessing or Curse?

Since the start of the 21^st century, Germany has been generating high export and current account surpluses. But something that Germany has welcomed as a success that secures jobs is being increasingly criticized by the rest of the world. Especially in the rest of Europe, accusations are growing louder that German exports are displacing domestic products and thereby fueling unemployment in those countries. What are the causes and consequences of Germany’s export surplus? What are potential ways to reduce it?

First – Why does Germany benefit from an export surplus?

A country’s current account encompasses the imports and exports of goods and services as well as international income and transfer payments. Imports and exports comprise the majority of the current account, so the terms current account surplus and export surplus are used synonymously here.

With an export surplus, a country is living below its means because not all goods produced domestically are consumed domestically. Thus, the exporting country accumulates assets relative to foreign countries. Moreover – and this aspect may be more important – an export surplus has a positive impact on the labor market: The country produces more goods than it consumes. If it only produced the things that the country itself consumed, fewer workers would be needed for production. Therefore, an export surplus leads to lower unemployment, which in turn reduces the burden on public finances because expenditures for unemployment are lower and tax revenues are higher. A country with a trade deficit experiences the opposite consequences.

Who has export surpluses?

A glance at trade balances in recent years shows that Germany, China, Japan and the Netherlands have high surpluses. The USA had the highest current account deficit from 2011 to 2014 at US$400 to 460 billion (see Fig. 1). Due to the high absolute amount, German export surpluses are receiving the most international criticism.

Fig. 1: Current account balances of selected countries in USD billions, values for 2014: Estimated values, source: International Monetary Fund, World Economic Outlook Database, April 2015.

Why does Germany have a high export surplus?

In addition to the high quality of German products, there are three main reasons for Germany’s export surplus:

Stagnating domestic demand: High production capacities encounter weak macroeconomic demand in the private sector. The volume of goods produced domestically is not fully needed by consumers and investors, and is therefore available export.
Favorable development of unit labor costs in international comparison: There is foreign demand for the surplus goods because these goods are priced more competitively due to wage restraint.
Membership in the currency union: This membership prevents Germany’s currency from appreciating, which would reduce the export surplus if there were a flexible exchange rate for the domestic currency.

Why is the German export surplus a problem?

Like current account deficits, export or current account surpluses are neither good nor bad on their own. They are the result of economic decisions made by consumers and companies and as such reflect their preferences. Nevertheless, the EU Commission criticized Germany’s export surplus in March 2014 and called on the German government to counter this development (Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances, page 13). The primary reason for this reprimand may be that Germany’s export surplus has become a permanent condition. This in turn is due to the fact that the central mechanism for reducing an export surplus – appreciation of the domestic currency – has been removed since the country joined the currency union. Two main challenges emerge as a result:

Germany’s higher employment level as an export-surplus nation stands in contrast to lower employment levels in countries with an unfavorable balance of trade. From this perspective, Germany is exporting its unemployment.
Due to its strong focus on exports, Germany’s economic growth depends heavily on global economic trends. A severe economic collapse worldwide would lead to an above-average slump in production. If global economic growth should slow down in the future (for example, if China drops out as an economic driver), weak domestic demand in Germany would impact the country’s overall economic development.

Reducing the export surplus – simple solutions will not work

The export surplus could be reduced by increasing both domestic demand and imports. There are simple solutions for both strategies; however, neither would be particularly effective.

Increase wages: Stronger wage growth stimulates consumer demand. However, government measures could not achieve this change because wages are determined by collective bargaining partners in Germany. Only the statutory universal minimum wage in place since January 1, 2015 offers an instrument for boosting purchasing power.
Reduce the saving rate: Lower saving rates in private households would increase consumer demand. However, since German workers will need to invest more in private pension plans due to demographic development over the next decades, this measure would be counter-productive over the long term.
Increase private investment: Higher investment is a prerequisite for adding economic value in the future. Not only would it serve as an instrument for reducing Germany’s export surplus, it would also help strengthen the country’s long-term economic capability. However, if investors consider anticipated domestic returns too low, the government in a market economy cannot order them to increase their investments. Tax deductions could prove helpful for stimulating investment. But these in turn lead to reduced state revenues, which increases public debt. In light of the debt ceiling in place, this is not a viable option for the future. Increased government spending for goods and services financed by debt is ruled out for the same reasons.

5 Measures for reducing the export Surplus

Nevertheless, economic policy is not completely paralyzed. There are five measures available, some of which represent a relatively massive change in the status quo and could further have significant redistribution effects.

Strengthen the service sector, which is highly regulated in Germany (see for example the OECD Economic Surveys: Germany 2014, chapter 2). Eliminating existing barriers to entry would likely increase investment and boost productivity, which would also increase wages and thereby stimulate demand.
Increase Germany’s imports. Tariffs and non-tariff trade barriers are traditional instruments for achieving this objective. However, Germany’s options for action are limited due to its membership in the European Union. Eliminating agricultural subsidies would offer one possibility. This type of subsidy represents unfair competition that puts foreign providers of agricultural products at a disadvantage.
Increase prices for the consumption of natural resources and for CO₂ emissions to internalize the associated negative external effects. The resulting rise in prices would reduce Germany’s exports and increase imports. In addition, it would boost incentives for producers in Germany to convert to more environmentally friendly processes that save resources. The restructuring needed for the domestic economy would require substantial investments in suitable technologies. These investments would stimulate demand in Germany and could therefore be in a position to compensate for the shrinking demand for declining exports.
Institute Tax reform that impacts higher incomes more heavily and reduces the burden on lower incomes. This would transfer the purchasing power from people with greater propensity to save to people with higher consumption tendencies, thereby increasing domestic demand.
Increase public investment. There is a range of areas with social needs that have not been embraced yet by private investors because private returns are too low: the transportation infrastructure, network infrastructures in the energy, wastewater treatment and broadband expansion sectors, converting the energy supply to renewable energy sources, expanding the education sector in every field, fundamental research and development of basic innovations, measures for dealing with global warming, and measures for better integration of immigrants.