A U.S. president could hardly put it more clearly: trump doesn’t like other countries’ trade surpluses with the U.S. He wants to bring lost jobs back to america. The new American protectionism is hardly helping the global economy, but neither is Germany’s obsession with running trade surpluses. The German surplus is increasingly financed by credit – a criterion that is often used to identify financial market bubbles.
The next meetings of angela merkel and donald trump, and the economic policy choices of the two countries, can be eagerly awaited. Recently, there have already been indications that the American president is taking a tougher line with his trading partners. picture credits: the white house
Financial market exaggerations are something that German households are instinctively as averse to as government deficits or credit-financed consumption. In few countries, therefore, is it as popular as it is in germany for the finance minister to announce that, despite high revenues, he will neither significantly increase spending nor cut taxes. There may be good economic reasons for a "black zero" in the state budget and against credit-financed consumption or purchases of securities. In Germany, however, there are always moral or cultural reasons as well. Surpluses are good, deficits are bad. This is already linguistically inherent in small differences: guilt and debt are clearly more similar than the english "guilt" and "debt"; or the "trespass" used in the english Our Father, where the german speaks heavily of schuld and schuldigern, and the french and spanish of "offenses" and "offenses" respectively. "ofensas" and in italian again close to the basic latin form of "debiti" and "debitori" is used.
The "de facto power of the normative"
Accordingly, in germany, "saving" has a positive connotation in the normative sense. saving is more than an economic quantity or the difference between income and expenditure. It signals a desire to forego consumption and is a virtue. Accordingly, it must – if not even encouraged by the state – then at least be rewarded by the market. The negative deposit rates introduced by the ECB are therefore contrary to all German instincts of fairness. That they were quickly branded with the normative term "punitive interest rates" is not surprising. Populists like to exploit this in their criticism of the system and the ECB. Even if it should be clear to them that a central bank neither punishes nor rewards. It is trying, unfortunately, to steer the economy with its interest rates. So it lowers its interest rates when it wants to boost investment and private consumption. It raises its interest rates when it sees inflation risks and wants to encourage savings.
This is clearly not the case at the moment, because Germany is already making enough savings. Not that saving is bad. But in germany, we have a higher supply of savings than investors need – our annual savings surplus is around 250 billion euros, which is around 8.5 percent of national income, more than twice as high as in china. It is probably no wonder that the German term "angstsparen" does not have a sensible equivalent in any other Western language. With the high volume of savings, private consumption, imports, wages and inflation remain correspondingly below desirable levels.
The german "virtue of thrift"
Many Germans find the criticism of their trade surplus just as incomprehensible. After all, the title of world export champion is worn with pride. Yet, in purely economic terms, this surplus is merely the difference between savings and investment. However, it is perceived as much more, namely as a signal to be internationally competitive – without excessive wage developments or indulging in idleness. More can’t really hurt. After all, germany is an aging society that will eventually want to draw on its savings.
Germany’s foreign assets now amount to more than eight billion euros – that’s about 2.5 times its gross domestic product. And here lies the difficulty. Foreign assets only help to cope with demographic burdens if they can be liquidated again. For this to happen, however, foreign debtors would have to generate export surpluses for once. Germany had to experience how difficult this is in the case of Greece. Without a flexible exchange rate with its main trading partners and borrowers like the similarly thrifty switzerland, germany is dependent on its international creditors themselves finding the "virtue of thrift". If they do not, there are no market or effective institutional means within a monetary union to force them to do so. In case of doubt, overindebtedness and non-payment are imminent.
Increase in TARGET2 balances
Currently, Germany’s current account surplus of about eight percent of GDP leads to capital exports of a similar amount. The successes of the export economy are not conceivable or sustainable without these German credits to foreign countries. Before the financial crisis, this was not a problem, as private capital flows financed the current account deficits of the european foreign countries with germany. Since then, however, a lower propensity to take risks has led german savers to prefer to invest their money in Germany. An increasing share of capital exports is therefore cleared through central banks – i.e. the public sector. These so-called target2 balances are rising accordingly in Germany, as are the liabilities of other countries. but isn’t germany indirectly financing a bubble of its own export economy and excessive developments, which it itself strongly rejects culturally, through these public financing flows to foreign countries??
America’s tougher stance on its trading partners
trump and merkel’s first meeting was not marked by excessive harmony. Since the failure of health care reform, donald trump now seems to be trying to score points on the trade balance and to get his administration to take a tougher line with trading partners. The further German-US meetings are therefore likely to be exciting. For the discussions between the two trading partners, it would be helpful to know each other’s cultural peculiarities – as well as one’s own.