German Trade Surplus Burden on EU Partners

While few European states can pretend to share Germany’s distinction of being a “country of poets and thinkers”, none can rival German abilities to extract so much wealth from the rest of the European Union.

Last year, Germany posted a €159.3 billion (183.7 billion) surplus on its goods trade with other countries in the EU—one of the world’s largest free-trade areas and a region with privileged access to German goods and services, Reuters reported.

That’s the way it’s been since 1958, when Europe’s common market opened up.

Germany’s enormous EU bounty consistently accounts for two-thirds of its net foreign trade income in a market structure where Berlin remains an undisputed leader and a principal regulator.

This year looks set to mark another record-high EU trade income for Germany. The surplus during the January-April period was running at an annual rate of €175 billion—a 10% increase on the country’s EU trades in 2017—according to statistics from Germany’s Bundesbank.

A country representing 28% of the monetary union’s economy and living so grandly off the rest of its partners is a structurally destabilizing factor.

 Increase Domestic Spending

To this day, economists pointing out that fundamental problem have been ridiculed as hopelessly naive because, as the mantra goes, the European project has always been, and always will be, a political construct to keep the Europeans off each other’s throats.

That charge is not only false, but it also bears the seeds of its own destruction.

Taking hundreds of billions of euros of purchasing power out of the monetary union, Germany makes it virtually impossible for other eurozone economies to grow and create jobs as they struggle to bring down their public debts and deficits.

Instead of accumulating enormous wealth on the back of its euro partners, Germany should stimulate its domestic spending to buy more goods and services from them.

At the same time, Germany can relieve its growing labor shortages by offering jobs to more than 17 million EU people that are currently looking for work and a meaningful future.

 Creating Employment

And there is more: Recycling some of last year’s roughly $300 billion trade surplus—through direct investments in the rest of the EU—Germany would boost economic growth and employment in other countries in the bloc, solve the problem of its shrinking manpower and adjust its overflowing external accounts.

Those would be appropriate economic policies for a country running large and systematic trade surpluses. Such policies would also even out the intra-area growth dynamics and stabilize the monetary union in a more homogeneous manner.

And none of that would be actions of EU solidarity loathed by the tight-fisted German government.

It is no wonder that the “everyone for themselves” attitudes have led to the revival of nationalism, alienation from the European project and an increasing popularity of “my country first” slogans—even in places like Italy, where the traditional idea of a united, peaceful and prosperous Europe inspired generations.

 Trade Tension

Germany’s hesitancy to reduce its trade surplus is contributing to trade tension and adds to risks that could undermine global financial stability, Maury Obstfeld, chief economist at the International Monetary Fund, said.

“In current account surplus countries such as Germany we see hesitant measures, at best, to counteract the surplus,” Obstfeld wrote in a guest commentary published in German daily Die Welt on Monday.

The IMF and the European Commission have long urged Germany to boost domestic demand by lifting wages and investment to reduce what they call global economic imbalances. Since his election, US President Donald Trump has also repeatedly criticized Germany’s export strength.

Obstfeld said that countries like the United States, in which the external current account balance is too low, should reduce budget deficits, encourage households to save more, and gradually normalize their monetary policy.

Countries in which the balance is too high, like Germany, should increase government spending, for instance by investing in infrastructure or digitalization, so that companies invest more domestically rather than looking abroad.

“The net external positions will diverge more. That increases the risk of disruption by currency or asset price adjustments in indebted countries, to the disadvantage of all,” he said.

“If there is a sudden adjustment, then both the debtor and creditor countries will suffer,” he added.