Germany’s Exports: Must It Ask Forgiveness For Its Strength?

Germany exportsVolkswagen factory

There are those who believe, like Macron, that Germany’s 8.8% trade surplus is damaging the Eurozone economy. “4% could be justified; but not 8%”, says IMF head Christine Lagarde.

Trump protests because Germany and the EU are benefitting from a “grossly undervalued euro”. The huge growth in Germany’s exports surplus is worrying. But it’s not just down to Berlin’s policy, but to other factors, like German companies’ competitiveness, the price of the euro, the favourable international backdrop, the price of raw materials, relatively low salaries and insufficient investments. The surplus also reflects the fact that many companies invest more overseas because salary costs are lower outside than inside Germany.

So should we oblige Germany to be less competivitive? André Wolf, from the world economic institute HWWI, in Hamburg, says that “wage moderation and labour reforms have strengthened the competitiveness of German firms”. Other reasons for the country being so competitive are qualifications, the quality of its infrastructures and its companies’ capacity for innovation. With respect to the euro’s weakness, brought about by the ECB’s policy, “if Germany integrated the Eurozone, it would have a stronger national currency and its neighbouring countries could export more,” says Catherine Hoffmann, from the daily newspaper Süddeutsche Zeitung. But the ECB makes policies for everyone, so interest rates are low and the euro is cheap. On the other hand, low oil prices alone contributed to increasing Germany’s trade surplus by 2% in 2016.

Nobody should apologise for exporting. “Completely the opposite, as it’s part of our economic model,” says Marcel Fratzscher, president of the institute DIW. The problem is not that Germany exports a lot, but that it imports very little. And it imports very little because it invests very little. And this is because the conditions are bad. Fratzscher points out: insufficient infrastructure and a lack of competition in some very regulated services sectors, so that only a few make big profits, but they don’t invest enough and have low productivity and pay low salaries. It’s one of the reasons for the increasing inequality. The other, technological change.

Germany insists Spain is benefitting from structural reforms. But it criticises Italy and France for not advancing with the agreed changes. A first step could be for Germany to invest more to reduce its trade surplus. Joschka Fischer, ex-Minister of Foreign Affairs, believes that Macron will need economic growth to be successful and that Germany should help him. Europe can live without the UK, but not without Germany and France. But there is no future for the EU with just Germany at its head. Europe has the impression that the euro arrived with conditions which were imposed by Berlin. And now Schäuble’s proposal for a European monetary fund is also very German. Agreement is needed.

Germany is being asked to spend more. Would it be enough to rebalance its economic model? Domestic consumption carries increasingly more weight, but it’s not sufficient. It transfers more capital than it receives. And what about hiking salaries? If unit labour costs rise 1%, the volume of exports only falls by 0.2%. The chairman of the Ifo, Clemens Fuest, prefers the State to improve the conditions for private investment. Whatever happens, Germany cannot solve this dilemma on its own. “Why is that foreign households can easily get lots of loans to buy goods Made in Germany? It should be more difficult to get into debt.”

 

About the Author

Lidia Conde
She studied journalism at the Autonomous University of Barcelona. Since 1991, Lidia lives and works in Germany as a correspondent for several Spanish newspapers, in which she has covered the fall of the Berlin Wall and the German reunification. Seeking an answer to how Europe could become competitive and fair, too.