12 June 2017

Germany’s trade surplus is a threat to the EU

By David Nonhoff

With Emmanuel Macron’s election as French president, a sharp critic of Germany’s vast export surplus has become one of the most powerful men in Europe. Although his opinion is shared widely by commentators, politicians, and organisations such as the IMF, the German public is still largely ignorant of the devastating consequences of the macroeconomic policies of its current government. Unless this changes, the internal cohesion of the European Union and the well-being of its citizens are under serious threat.

Year after year, Germany’s trade surplus is celebrated in the German media. Since the euro became legal tender in 2002, the surplus has increased from 0.27 per cent to almost 9 per cent in 2016.

Many Germans seem quite happy to be the “world champion of exports” (Exportweltmeister). They attribute this “success” to the outstanding competitiveness of German companies, the quality of their export products and the flexibility of the German labour market. Unfortunately, they are failing to grasp the main cause of the export surplus and its unsustainable consequences.

After the collapse of the Soviet Union, the traditionally strong German trade unions feared the massive outsourcing of jobs to Eastern Europe. Wages in the Eastern bloc were much lower, so there was a potential risk of companies moving their production sites East, which would have led to rising unemployment in Germany. In tandem with the high costs of German unification, the trade unions thus agreed to intentionally keep domestic wages low to keep employment in the country. It is these suppressed German wages that lie at the heart of the problem.

German companies soon produced at comparatively lower prices than their counterparts in other countries. Consequently, German products, such as machinery or cars, became much cheaper and could easily be exported. The export surplus grew and money flowed into the country.

However, the money had to come from somewhere. Since the world is an economically self-sufficient system that cannot borrow from anywhere outside, whenever money flows into one country, other countries by definition have to be indebted by the exact same amount. Germany’s huge trade surplus therefore relies on other countries’ debts.

In order to get rid of public debt, a country has to engage in countercyclical fiscal policies. This means that during times of recession and increasing debt, the respective country has to increase public spending and reduce taxes. As a result, citizens and companies will have more money at their disposal which they can spend and invest. This in turn increases economic growth and employment and thereby allows the respective country to grow out of its debt.

In the case of Greece, however, Germany acts against such macroeconomic rationale by imposing brutish austerity measures on the Mediterranean country. Greece is forced to increase taxes and reduce social welfare spending which has led to a continued stagnation of the Greek economy.

Economic growth is low, unemployment remains high and the Greek people have to suffer tremendously under ever more cuts and deprivations. The Germans reckon that all this will eventually increase Greece’s competitiveness: the country will, at some point, be able to produce cheaply, export, and hence increase the flow of money into the country.

But Greece would need years of falling wages to regain competitiveness against German producers. Wages have already been cut significantly and falling wages in general create falling demand and hence lead to less economic growth: encouraging a downward spiral in an already existing recession is exactly the wrong thing to do.

As the economist Heiner Flassbeck has pointed out, this is unsustainable. Through the prolonged economic crisis and the absence of significant signs of recovery, nobody wants to lend money to Greece. Lenders are uncertain whether the debtor country will be able to pay back the borrowed money. As a result, interest rates rise and it gets more and more costly to borrow. This makes it much more difficult for countries in crisis to generate the necessary liquidity to grow out of their public debt. If creditors such as Germany defend their surplus positions by all means, the default of debtors such as Greece becomes unavoidable.

Germany should, therefore, engage in massive investment programmes and increase domestic wages. This would result in the comparatively higher competitiveness of companies in debtor countries and also increase German imports. It would allow Greece to increase its exports and lead to a flow of money into the country. Economic growth and incomes would rise, unemployment would fall, and a potential Greek default could be avoided. This would strengthen the cohesion of the eurozone and allow for deeper fiscal integration.

So before it’s too late, the German public should exhort its government to change its macroeconomic policies towards countries such as Greece. Failure to do so will prolong the suffering of the Greek citizens. More and more of them will be driven into the arms of those right-wing extremists who feed on the dissatisfaction of low-paid and deprived people who feel left behind – and the cohesion of the EU will be seriously threatened.

David Nonhoff is a research assistant at the German Bundestag and a contributor to Young Voices