Germany Trade Surplus  a Problem
World Economy

Germany Trade Surplus a Problem

In a few weeks, the International Monetary Fund and other international groups, such as the G20, will meet in Washington. When I attended such international meetings as Fed chairman, delegates discussed at length the issue of "global imbalances" - the fact that some countries had large trade surpluses (exports much greater than imports) and others (the United States in particular) had large trade deficits. China, which kept its exchange rate undervalued to promote exports, came in for particular criticism for its large and persistent trade surpluses, Ben S. Bernanke wrote for Seeking Alpha.
However, in recent years China has been working to reduce its dependence on exports and its trade surplus has declined accordingly. The distinction of having the largest trade surplus, both in absolute terms and relative to GDP, is shifting to Germany.
In 2014, Germany's trade surplus was about $250 billion, or almost 7 percent of the country's GDP. That continues an upward trend that's been going on at least since 2000.

Economic Success
Why is Germany's trade surplus so large? Undoubtedly, Germany makes good products that foreigners want to buy. For that reason, many point to the trade surplus as a sign of economic success. But other countries make good products without running such large surpluses. There are two more important reasons for Germany's trade surplus.
First, although the euro – the currency that Germany shares with 18 other countries – may (or may not) be at the right level for all 19 euro-zone countries as a group, it is too weak (given German wages and production costs) to be consistent with balanced German trade.
Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country's domestic spending, including spending on imports.

Trade Surplus a Problem
In a slow-growing world that is short aggregate demand, Germany's trade surplus is a problem. Several other members of the eurozone are in deep recession, with high unemployment and with no "fiscal space" (meaning that their fiscal situations don't allow them to raise spending or cut taxes as a way of stimulating domestic demand). Despite signs of recovery in the United States, growth is also generally slow outside the eurozone.
Persistent imbalances within the eurozone are also unhealthy, as they lead to financial imbalances as well as to unbalanced growth. But with eurozone inflation well under the European Central Bank's target of "below but close to 2 percent," achieving the necessary reduction in relative costs would probably require sustained deflation in nominal wages outside Germany – likely a long and painful process involving extended high unemployment.
Germany has little control over the value of the common currency, but it has several policy tools at its disposal to reduce its surplus – tools that, rather than involving sacrifice, would make most Germans better off.


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