For years, Germany has been producing high and rising export surpluses. What has domestically been regarded as a welcome development that safeguards jobs is increasingly being met with criticism throughout the rest of the world. Donald Trump is not the only one tweeting and complaining about German export surpluses. Even France’s newly elected President Emmanuel Macron has been critical, labelling Germany’s economic strength as unsustainable. In reality, I believe that Germany must contribute to the reduction of its export surpluses. However, rather than actively decreasing our exports, what we need to do is to increase our imports.
Whether it’s Paris or Washington, the economic policy consensus with regard to German exports is always the same: Germany exports too much and does not consume enough. This leads to imbalances that cost low-exporting trade partners dearly. Is there any truth to these accusations?
What are the consequences of export surpluses?
If a country’s exports are greater than its imports, this has two main consequences:
- An export surplus has a positive impact on the labor market: the country produces more goods than it consumes. If the country were only to manufacture the things that it itself requires, this would involve less labor. The export surplus therefore means that there is a lower level of unemployment, which in turn relieves the burden on the public purse due to the fact there is lower expenditure in the field of unemployment and greater revenue from taxes.
- The country accumulates wealth vis-à-vis other countries, because it brings in more money through its exports than it spends on acquiring goods and services (imports) from other countries.
The reverse is true in a country where there is an import surplus: the country accumulates debts vis-à-vis the rest of the world and has a lower level of employment, or, in other words, greater unemployment.
Why does Germany have high export surpluses?
In addition to the quality of German products, I believe there are two central reasons for the current export surpluses in the German economy:
- Weak domestic demand: The weak consumer demand and the low volume of investment lead to an excess of savings (see 1). The high macrosocial savings mean that the amount of goods that are produced in Germany are not completely required by consumers and investors, and can therefore contribute towards an export surplus.
- Membership of the currency union: This membership prevents an appreciation of the German currency. If the domestic currency had a flexible exchange rate, this appreciation would reduce the export surplus.
Why are the German export surpluses problematic?
Initially, export surpluses – much like import surpluses – are neither good nor bad. They are the result of economic decisions made by consumers and companies, and thus reflect their preferences. However, the European Commission criticized the German export surpluses back in March 2014 and called on the federal government to counteract this development. This is likely to be primarily because German export surpluses have by now become a lasting phenomenon. This, in turn, is due to the fact that the central mechanism employed to reduce an export surplus – the appreciation of the domestic currency – has been disused since the country became a member of the euro area. This results in four main challenges:
- The higher level of employment in the country with an export surplus, Germany, stands in contrast to the lower level of employment in countries with an import surplus. So in a sense, Germany is exporting its
- Due to its strong export focus, Germany’s economic performance depends very heavily on the global economic situation. A significant worldwide economic collapse would bring about above-average drops in production. Should the global economy grow at a slower rate in the future (for example, because the economic juggernaut that is China breaks down), the weak internal demand will have an impact on the overall economic development.
- Provided the economic pressures – rising unemployment with social consequences and escalating debt overseas – continue to increase in the countries with import surpluses, there is a danger that they will react by implementing protectionist measures. This frequently leads to corresponding reactions from their trade partners, who introduce trade restrictions of their own. This may result in a global protectionism race that reduces export opportunities for all countries. Particularly for export-oriented economies like Germany, this would prompt a strong economic downturn with an increase in unemployment.
- The wealth that is built up vis-à-vis other countries by means of export surpluses decreases in value if the companies in question or the state go bankrupt or if there is a strong depreciation of the foreign currency. In both cases, Germany would have exchanged its goods for worthless receivables and, in the extreme case scenario, ultimately given them away.
Measures to reduce export surpluses
Rather than a reduction of exports, what we really need if we are to reduce export surpluses is to increase both domestic demand and imports. In addition to wage increases, which lie within the sphere of responsibility of the tariff partners, there are two measures in particular that the state could implement:
- Dynamize the service sector, which is particularly highly regulated in Germany (see OECD 2016: 35, 71–73). If existing access restrictions are eliminated, one can expect that investments will go up and productivity will increase, which should also go hand in hand with an increase in wages and salaries paid and thus increase consumer demand.
- Increase public investments. In a range of areas, there are social requirements that are not implemented by private investors due to an excessively low private return: transport infrastructure; network infrastructure in the fields of energy, wastewater disposal and broadband expansion; transformation of the energy supply into renewable energies; expansion of the education sector; basic research and development of basic innovations; measures to deal with global warming and measures to improve the integration of migrants. The state should therefore increase the level of public investment in these areas.
Germany’s export surpluses lead to a high level of employment within the country itself and can therefore, initially, be interpreted as positive. However, it becomes problematic if mechanisms that establish a balance between exports and imports – above all through the appreciation of the domestic currency in the event of an export surplus – are no longer effective. This has been the case for German export surpluses since the country became a member of the euro area. It then becomes necessary to take economic policy countermeasures, as lasting trade imbalances can intensify labor market problems in the rest of the world and trigger protectionist measures. Countries whose imports are higher than their exports on a sustained basis have obligations to fulfil in this regard. They must do everything in their power to increase their competitiveness.
However, Germany must also step up its efforts in order to bring about an increase in domestic demand and imports. Measures to restrict exports, meanwhile, are not appropriate. They would serve to lower production and employment not only in Germany, but also in those countries from which German export companies obtain their intermediate goods.
 Export surplus and exchange rate: Ultimately, exports must always be paid for in the currency of the exporting country, because the exporting companies pay their wages, rents, taxes and other costs in their domestic currency. High exports therefore lead to a high demand for the exporting country’s currency. As a result, the price for the exporting country’s currency rises on the foreign exchange markets. This appreciation makes the prices for the exporting country’s products more expensive throughout the rest of the world and thus reduces its exports. In theory, the appreciation lasts until the exports correspond with the imports and the export surplus has been reduced.
OECD. OECD Economic Reports: Germany 2016. Paris 2016.
Petersen, Thieß. GED Focus Paper “Germany’s Export Surpluses – Blessing or Curse?”. Gütersloh 2015 (German only).