EU Economy
Germany's Surplus: Lots of critics; Credible solutions scarce
By Michael Hennigan, editor and founder of Finfacts
Aug 13, 2015 - 8:59 AM

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German economy and energy ministry

Germany's Surplus: There are many critics of Germany's trade and current account surpluses but credible solutions are scarce.

In 2014 the three countries Germany, France and Italy accounted for 65.2% of Euro Area GDP (gross domestic product) and the future survival of the single currency is dependent on this troika.

Germany accounted for 28.7% of GDP; France 20.7% and Italy 15.8%.

Germany has posted a merchandise trade surplus every year in the period 1952-2014 and a continuous goods and services surplus every year since 1993; World Bank data show that France has had a combined trade deficit every year since 2005 while Italy posted a deficit every year in the period 2005-2011 — Italian surpluses since reflect both a rise in exports and a plunge in imports as the economy shrunk.

Germany has been able to maintain a positive merchandise trade balance over six decades, irrespective of exchange rate movements.

Both France and Italy have had continuous annual budget deficits every year since 1975 and 1945 respectively.

Suggestions that Germany should raise investment, cut savings and reform domestic services markets do have merit. However, European Commission economists calculated in 2013 that a 1% rise in German domestic demand would mainly benefit domestic production and its effect on the German trade balance would amount to about 0.2% of GDP; the greatest benefits would be for the Czech Republic, followed by Slovakia, Hungary, Austria, and the Netherlands.

The trade balances of Spain, Italy and Portugal would gain 0.02% of GDP, and the Greek balance would be less.

In recent years German pay increases have outpaced inflation and on a price basis, US manufacturing is more competitive than Europe's big manufacturing nationsGerman manufacturing workers are the best paid among the big countries.

In 2014 net exports only accounted for a quarter of the German GDP growth of 1.6% and most jobs added in the economy have been permanent ones in contrast with the position in the UK.

Deutsche Bank economists say: "Germany's overall economy will be driven primarily by private consumption in 2015 in particular. The healthy state of the labour market (high employment coupled with a low unemployment rate), above-average wage hikes as well as real income gains thanks to lower mobility and energy costs all play a key role. Private consumption is set to grow faster in 2016 than it did on average during the past decade. While investment in machinery and equipment is also expected to increase in Germany this year and next, the expansion will be modest compared with earlier upswing phases. Since German manufacturers are major producers of capital goods in particular, the demand stimuli from the domestic market as a whole will remain limited. Real domestic revenues were flat in H1 2015 relative to the year-earlier value."

According to the OECD, the-think for 34 mainly developed country governments, while around 90% of the value of German and UK exports are made by companies exporting to more than ten markets, nearly three-quarters of German firms export to only one market, twice the rate of UK firms. In general, trade remains regional, with small and medium-sized enterprises (SMEs) in particular tending to export disproportionally more to neighbouring countries. "In a number of nations, such as Spain and the Netherlands, the contribution of SMEs to trade with emerging economies, notably China and India, is significant and growing."

German firms from micro to the biggest companies in their global sectors, are good at exporting and not only is the structure of firms conducive to exporting, Germany has many more exporting firms than the other big economies in Europe — based on recent data, the population ratio per exporting firm is 187 in Denmark; 236 in Germany; 550 in France and 1,150 in Ireland.

Bruegel, the Brussels-based think-tank, says in a paper: "the evidence indicates that the main differences across countries are dictated by the industrial structure. Similar firms behave similarly across countries, but Germany has a structure which favours the internationalisation of its economy much more than Spain and Italy. In particular, the greater presence of medium and large size firms dictates greater involvement in international activities."

In 2014 Germany's biggest merchandise exports category was motor vehicles and parts at 18% but almost two-thirds of the production increase of German car manufacturers since 2000 has been outside Germany, mainly in plants across Europe.

This year a briefing note produced by economists at the Brookings Institution and JP Morgan Chase, examined why the United States had a $667bn manufactured goods trade deficit while Germany’s trade surplus in manufacturing was about $425bn in 2014.

Despite the cost gap, more successful German innovation and employee training are key factors.

Last month Bruegel economists in a blog post wrote: Germany is ‘Exportweltmeister’ (world champion in exporting) as it is phrased by the German media. Between 2000 and 2013 German exports increased by 154% compared to 127% in Spain, 98% in the UK, 79% in France and 72% in Italy.

They concluded:

What explains Germany’s exceptional export performance relative to other European countries? We find that Germany is a world champion in exporting because it is a world champion in organizing. The export superstars of Germany base their export business model on quality by operating with a decentralized less hierarchical organization which empowers workers at lower levels of the firm hierarchy. As a result 40% of German exporters sell top quality export goods. Decentralized management has been effective to increase the export market share of top quality goods in Germany which demonstrates that decentralizing the organization may actually work to improve the product quality of exporters. Austria shares many of these features with Germany, while the superstars of all other European countries base their export business model mainly on price with or without a care for quality. The focus on quality may explain why export growth in Germany and Austria rebounded quickly after 2009 in spite of rapid rising nominal wages."

Expecting Germany alone to reduce imbalances in the Euro Area would likely be a loss for Europe in the long-term as in sectors such as machine tools, chemicals and vehicles, other European countries would struggle to create new global brands.

Analysis: Germany world's top surplus economy; UK tops deficit ranks

G7 comparison charts published in 2015 by the German finance ministry

Germany's more than 1,300 'Hidden Champions'

Some facts...

  • In 2014, the current account, comprising the balances of cross-border trade in goods (trade balance), cross-border trade in services (services balance) and cross-border payments arising from employment and assets (income balance) and current transfers resulted in a surplus of €215.3 or 7.4% of GDP;
  • The export ratio (i.e. exports' percentage share of GDP) increased slightly to 45.7% in 2014 and the import ratio fell to 39.1%;
  • Germany recorded a trade surplus in the trade of goods of €216.91bn (up €22.0bn from 2013). The deficit on trade in services was €50.0bn (2013: €45.6bn);
  • 57.2% of the total German trade surplus was with the other 27 EU countries. Almost a third of the surplus (29.8%) was attributed to the rest of the Euro Area;
  • Germany recorded the largest trade surplus with the US (+€47.5bn or 21.9%), United Kingdom (+€41.8bn or 19.3%), France (+€34.5bn or 15.9%), Austria (+€19.8bn or 9.1%);
  • A quarter of total employment depends directly or indirectly on exports (1995: 15%). In the industrial sector, the ratio is even one in two jobs (55%), but in the services sector only one in seven (15%). One third of final domestic demand is covered by imports (import dependency ratio of 34.1%). In the case of exports, the share of imported upstream goods is significantly higher, at 43% (1995: 30%). The bulk of German imports come from European Union countries.

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