Surplus Germany

Abstract

This article privileges an institutional explanation rooted in the financial sector for the persistent German trade surpluses of the past 15 years. Specifically, it explains the disruptive consequences of a long-running stagnation in domestic investment in combination with rising German savings, particularly from corporate and government actors. It links these outcomes primarily to policy changes in the early and mid-2000s. The article also offers a constructivist explanation of how German elites have understood (and often misunderstood) the trade surplus. I characterise German elites as using a formula of ‘normalise and apologise’ to explain away worries about the surplus. The result is what one might call a ‘political narrative of unbalanced growth.’ The argument concludes with implications for the tense German-American economic relationship.

ACKNOWLEDGEMENTS

Thanks to Tobias Schulze-Cleven and Sidney Rothstein for editing this special issue and for advice on this article. For additional advice—not all of which I followed—I thank anonymous reviewers and Lucio Baccaro, Jörg Bibow, Mark Blyth, Peter Bofinger, David Bokhorst, Frédéric Bozo, Richard Bronk, James Caporaso, Heribert Dieter, Rachel Epstein, Stefan Fröhlich, Lothar Funk, the late Crister Garrett, Mark Hallerberg, David Howarth, Harold James, Erik Jones, Elizabeta Jevtic-Somlai, Michael Kimmage, Hans Kundnani, Matthias Matthijs, Yascha Mounk, Antonius Notermans, Darius Ornston, Craig Parsons, Michael Pettis, Ted Reinert, Mary Elise Sarotte, Waltraud Schelkle, Hermann Mark Schwarz, Ulf Slopek, Steve Szabo and Heidi Tworek. I thank Alex Haag for research assistance.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

ABOUT THE AUTHOR

Wade Jacoby is Mary Lou Fulton Professor of political science at Brigham Young University and was previously an assistant professor of political science at Grinnell College (1995-2000). He has also been a senior fellow at the Transatlantic Academy. His books include Imitation and Politics: Redesigning Modern Germany (2000) and The Enlargement of the EU and NATO: Ordering from the Menu in Central Europe (2004). Jacoby has published articles in many journals including World Politics, Comparative Politics, Comparative Political Studies, Politics and Society, The Review of International Political Economy, The Review of International Organizations, and The British Journal of Industrial Relations.

Notes

1. While this article focuses on US-German trade disputes, Germany’s frequent violations of the EU’s Macroeconomic Imbalance Procedure have raised similar concerns. See Bokhorst (2019).

2. This article cites many views of specific German officials and institutions, but it also builds a composite picture of German views on the trade account. To do so, it draws on dozens of conversations in Washington, DC and Germany over the past three years with a range of German officials. Some were formal interviews, but some occurred in discussions in Germany around roughly two dozen lectures given there during those years. In addition to policy makers, these discussions were with editorial boards and other press, chambers of industry and commerce and representatives of German industry in the United States. A list of interlocutors is available on request.

3. The constructivist element complements the account elsewhere in this issue of Germany’s instrumentalisation of select ordoliberal ideas (Young 2020; see also Höpner 2019, 25–27; Jacoby 2014a).

4. Similarly, the surplus has also been very high with oil around $50 a barrel—but was still plenty high with oil at $110 a barrel in 2014.

5. ‘Apologise’ is meant in the sense of ‘apologist’—someone who explains away apparently damaging evidence. For one Finance Ministry example, see Schuknecht (2017). For German responses to parallel complaints in the EU’s Macroeconomic Imbalance Procedure, see Bokhorst (2019).

6. Technically, the current account is a country’s net balance in traded goods and services, net income on its overseas investments, and net “transfers” (remittances, grants, or tax payments). However, the trade portion is, by far, the largest.

7. Excellent accounts are Pettis (2013); Jones (2009); Tilford (2015); Schwarz (2019); Höpner (2019); Econometric studies include Kollmann et al. (2014).

8. For example, Handelsblatt’s Kluth (2017), who clearly understands the savings-investment dynamics far better than the average journalist, consistently attributes these imbalances to “voluntary decisions by free agents.”

9. To be sure, there are doubters. Hans-Werner Sinn worries that intra-EU debt in the TARGET2 system won’t be repaid, which would follow on German foreign losses in the ‘dot com’ and subprime crashes (Sinn 2013; Schnabl 2017; Schelkle 2017).

10. To be sure, with increased global capital mobility, this exchange rate adjustment mechanism has clearly weakened as many more factors affect currency values. For a good introduction, see the views in Dooley, Folkerts-Landau, and Garber (2004); Eichengreen (2004).

11. During the Obama Administration reports, Taiwan was listed, while India was not.

12. Both US administrations have judged that the ECB has not intervened substantially on foreign exchange markets since its (coordinated) effort after the 2011 Japanese earthquake.

13. Technically, central bank reserves play a part in this balance, along with errors and omissions.

14. That said, meta-analysis finds no evidence that transnational capital flows have enhanced growth (Rey 2014, 307–313).

15. For details on how unwanted capital inflows cause unemployment, see Pettis (2013), (2015a).

16. Exceptions include Landmann (2017a) and Landmann (2017b); Dieter (2018); von Weizsäcker (2016); Funk (2016). Bertelsmann Stiftung (2015) is a partial exception. It notes that Germany ‘exports its unemployment’ (3) but then, characteristic of apologist reasoning, laments that the debt-brakes and demographic developments legitimately limit the state response (4–6, 11–13). Felbermayr, Fuest, and Wollmershäuser (2017) also stress demographic shifts as a primary cause of the savings increase.

17. German household savings rates have remained unchanged, though they are the highest in the OECD outside Switzerland and 6 percent above the EU average. See Dieter (2018, 27).

18. Others went outside the eurozone to Central and Eastern Europe (Jacoby 2014b).

19. As noted, a partial exception is Kluth (2017). More usually, however, the concern expressed about capital flows is that Germany is getting IOUs for German products (Rudzio 2017; Schnabl 2017).

20. Both Redeker and Walter (2018) and the current article thus respond to Baccaro and Pontusson’s (2018, 2) call to foreground ‘distributive conflict and power relations’ over rational expectations. See also Rixen (2019).

21. All data in this paragraph are from Haver Analytics.

22. Profits not distributed to shareholders are a form of savings. Elsewhere in this special issue, Braun and Deeg (2020) show that German banks have become less profitable because many German firms have become lenders rather than borrowers. See also Bundesbank (2017a).

23. With markedly different conclusions, capital account issues arise in Bofinger and Ries (2017), Dieter (2018), Bertelsmann (2015), Sinn (2013) and Schnabl (2017). See also Hellwig (2017).

24. To be sure, Felbermayr et al have uncovered inconsistencies between US and Eurostat data. However, we cannot explain nearly two decades of multilateral imbalance as the result of bilateral statistical noise. Meanwhile, others suggest Germany’s official statistical agency has exaggerated German domestic demand to play down reliance on exports. Flassbeck and Spiecker (2019).

25. The same flaw is apparent in the joint 2017 report from the Ministry of Finance and Ministry of Economics, which also ignores the capital account (Bundesministerium der Finanz 2017).

26. This paragraph uses Eurostat data for 2007, the eve of the crisis, and 2017, a decade later.

27. Indeed, the Bundesbank (2017b) claims that even if all the countries with which the US has strong bilateral trade deficits would boost domestic consumption by a full percentage point, the aggregate effect on the US would be small.

28. German officials often suggest the US benefits from German FDI. But such FDI helps if and only if the US lacks capital, technology, or management skills. Even aside from the Volkswagen scandal, such a scenario is implausible. A more plausible scenario is that once German capital exports to peripheral Europe slowed after 2009, new outlets were required in order to keep exports booming.

29. Incidentally, this charge is generally confused, as loanable funds theory was explicitly developed to remedy the overly-simplistic classical theories that did indeed see no other source for investment than savings.

30. The argument in this paragraph is indebted to Michael Pettis (2015b).

31. Though where debt is low, such dynamics might be reasonably ignored in much the way that engineers might ignore friction when it is small.

32. The IMF predicts that on its current trajectory, the German surplus will decline by only about 1 percent of GDP by 2022 (e.g., to about 7.3 percent). At that point, large surpluses would have been sustained for two decades (IMF 2017).

33. See, e.g., Weidmann’s quotes in C. Jones (2014).

34. For the argument that the United States could and should restrict capital inflows, see Austin (2016; 2020); for the causal mechanisms on unemployment, see Pettis (2013, 104–106, 110–116).

 

Additional information

Funding

Research support was provided by the Transatlantic Academy.