Truth Behind Germany’s Huge Financial Surplus

Angela Merkel’s nation is running a current account surplus of around $294.8 billion, or 8.6% of GDP, according to the latest figures.

The German government is a monstrously large net saver, with the 2016 budget surplus sitting at around $25.86 billion, a record high—but there is a shocking truth behind these figures, according to Barry Eichengreen, professor of economics at the University of California, Berkeley, news outlets reported.

The former senior policy adviser at the International Monetary Fund said sensible Germans are not spending their money, they are ferreting it away into savings accounts or piggy banks and accumulating assets that will help them spend their retirement in total comfort.

He said this was the reason for the nation’s healthy economic strength, which has drawn criticism from US President Donald Trump.

Trump has been particularly angered by Germany’s monetary system, which is diametrically opposed to his “America first” outlook. He believes countries with large surpluses should be making greater contributions to the world, by doing things like giving more money to NATO.

Eichengreen said: “Germans collectively spend less than they produce, and the difference necessarily shows up as net exports.”

Even though Merkel is cutting taxes, the population is not spending their additional income, and they do not appear to be inclined to do so at any stage of their life. This means the economy will never get a valuable shot in the arm from public expenditure.

Eichengreen said: “The problem is that there is no guarantee that German households, being voracious savers themselves, will spend the additional income. Extending investment tax credits to German firms might be more effective in boosting spending, but doing so would be politically problematic in a country where labor’s share of national income is already declining.”

Big businesses, who are expecting low returns from the older population of tomorrow, are now investing outside Germany. Investment is leaving Germany and the ageing population is hoarding cash with no desire to ever put it back into the economy, meaning disaster could be just around the corner.

The explanation for Germany’s current account surplus is not that it manipulates its currency or discriminates against imports, but that it saves more than it invests.

Deficits in Eurozone

How could Germany, with a budget surplus last year of 0.8% of GDP and the public debt of 68.3% of GDP, accept a fiscal union with Spain running the eurozone's largest budget deficit of 4.5% of GDP and a public debt of 100% of GDP?

France and Italy have similar public finance profiles. Last year, France had a second-largest eurozone budget deficit of 3.4% of GDP and a public debt of 96% of GDP. During the same period, Italy ran a budget deficit of 2.4% of GDP and a public debt of 133% of GDP, CNBC reported.

This means that half of the eurozone economy (France, Italy and Spain), with serious structural problems of public finances, would become part of a de-facto federal state with a fiscally sound Germany.

Obvious Reason?

The question, ultimately, is why Germany should seek to reduce its current-account surplus. One answer is to get out of Trump’s sights. A better answer, offered by the International Monetary Fund, is that doing so would be good for a world economy in which investment is in short supply, as evidenced by record-low interest rates. It would be good for southern Europe, which needs to export more, but can only do so if someone else, like the largest northern European economy, imports more.

Most of all, more investment in infrastructure, health and education would be good for Germany itself. Well-targeted public investment can raise productivity and boost living standards, ameliorate concerns about inequality, and address Germany’s economic weaknesses.