There Is No Easy Fix For the German Surplus

(Bloomberg View) -- Officials may not say so directly, but the U.S. appears to consider Germany a currency manipulator. Germany's large trade surplus, the accusation goes, comes at the expense of U.S. companies.

So, as German Finance Minister Wolfgang Schaeuble traveled to Washington on Wednesday for an International Monetary Fund meeting, he brought along an eight-page primer on the German current account balance. President Trump may not take the time to read it, but it could be useful to others who believe Germany is creating an unfair trade advantage for itself.

Germany's accusers point out that, had it not been a euro area member, Germany would have seen its exports damped by an appreciating currency. As it is, the economic weakness of other euro members is driving the common currency down and helping German exporters. That's a simple argument, and Germany doesn't have a similarly simple answer to it. Germany has to admit that the euro is currently undervalued against the U.S. dollar; though its rate is about 10 percent higher than the historical average today.

And many of the more complex arguments Germany makes in its defense will be rejected out of hand. German references to the euro's status as a free-floating currency and to the lax monetary policy of the European Central Bank, which Germany has long and vehemently opposed, have been swept aside. Isn't it all a German project, anyway, they say. Nevermind what the ECB's low interest rates, which keep the euro relatively weak, do to German savers, who make up much of Chancellor Angela Merkel's political base. The hypotheticals of current Deutsche mark cross rates to other currencies are a game for economists, not practitioners. 

Nor do arguments about the quality and uniqueness of German exports go very far with Germany's accusers. Try explaining the difficulty of replacing German premium cars, machinery and precision instruments, which make up the bulk of the country' exports, with anything cheaper but comparable in quality and prestige.

Germany has actually been doing what critics have long demanded -- for example, increasing government investment by almost 45 percent in the current legislative period. That and other government measures have contributed to cutting the current account surplus to 7.5 percent this year from 8.6 percent in 2015 -- and a predicted 7.1 percent in 2018. That's not considered good enough by Germany's critics.

And, of course, no one in the U.S. will take kindly to German advice on how to run the American economy. As Schaeuble's note says:

Since 2000, public debt in relation to GDP has increased from 64 to 108 percent. Most of the foreign capital inflow was therefore used for the financing of public budgets. If public debt growth is curbed, as the current administration announced it intends to do, that can have a positive effect on the current account deficit.

But even if all these well-known German arguments in defense of the country's economic policy are disregarded as usual, it's worth paying attention to the part of the position paper that lays out the structure of the German current account surplus. A lot of it doesn't come from trade, but rather from financial flows.

A quarter of Germany's current account surplus comes from the repatriated profits from past years' foreign investment, says the paper. According to the United Nations, Germany's stock of outward foreign direct investment between 1990 and 2015 is second only to that of the U.S. In 2015, it reached $1.8 trillion. Much of that money went to emerging economies at a low starting point in their development, and the German companies' gambles are now paying off handsomely. European companies, including German ones, pay out far more of their profit as dividends than do U.S. companies. That drives up the country's current account balance.

Another contribution to the positive current account balance comes from Germans' high propensity to save rather than consume: It reduces the need for imports. In 2015, Germans' household saving rate stood at 9.7 percent, compared with 4 percent in the U.S. But it's been on its way down from 11.5 percent in 2008. The German government says in the position paper that demographic change is driving that trend: As the population gets older, it begins to spend more of the accumulated wealth. Much of the German savings is kept outside the euro zone: Germany accounts for about 40 percent of the euro area's portfolio investment outflow. The population aging will eventually draw down the stock of such foreign investment.

In terms of price competition, Germany received a massive boost in the early 1990s as the country reunified. Wages are still lower in the eastern states than in the west, but the difference is gradually being erased and wage growth is picking up. Since 2010, German wages have grown by an average of 1.5 percent a year. That doesn't affect competitiveness as drastically as exchange rate volatility, but over time, the trend works against big German trade balances.

Other sources of German advantage -- such as the ECB's low rates and cheap energy and raw materials -- aren't permanent, either.

In effect, Germany is telling its critics that its trade balance in the product of a confluence of many factors: prudent government policy, wise private investment and circumstances beyond the German authorities' control. The government's view is that the advantage is set to erode, but the erosion won't be quick.

That's probably too slow for those who moan about an unfair German advantage. But the only way to speed up the normalization of Germany's current account balance is through drastic protectionist measures, leading to a damaging trade war involving the entire EU. The Trump administration should take the time to study the detailed argumentation before it embarks on that potentially disastrous course.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website

To contact the author of this story: Leonid Bershidsky at

For more columns from Bloomberg View, visit