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News : EU Economy Last Updated: May 7, 2013 - 7:00 AM

Germany's Trade Surplus: The myth and reality
By Michael Hennigan, Finfacts founder and editor
Apr 29, 2013 - 8:44 AM

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Siemens won an order in 2011 valued at €6bn from Deutsche Bahn to supply a new design of high speed trains. This contract for 220 train sets is said to be the largest ever single contract awarded to Siemens in its then 164 year history.

Germany's Trade: Germany's trade surplus has been an issue of controversy for desk-bound economists and some others in recent years. Like most economic issues, many issues are in play and myth can easily become conventional wisdom if enough of people sing the prevailing mantra. The key fact is that in 2012, almost 75% of the trade surplus was ex-EU27 and that was a positive situation for Europe.

There is of course no Utopia and while Germany could do more to boost consumption and reform its services sector, it cannot arrange a fiscal policy to make the output of PSA Peugeot Citroën of France, more popular in China.

The German foreign merchandise trade balance showed a surplus of €188.1bn in 2012, which is the second largest surplus since the introduction of foreign trade statistics in 1950, according to Destatis, the federal statistics office. In 2011, the surplus of the foreign trade balance had been €158.7bn. The largest surplus to date of €195.3bn was recorded in 2007. The deficit in services was –€6.7bn.

France’s trade deficit shrank by €7bn in 2012, to €67bn, from its record high of €74bn in 2011. The improvement looks unimpressive. However BNP Paribas, the French bank, said it hides a significant reduction in the deficit on manufactured goods, half of which was wiped out by a further increase in the energy bill. This reduction mainly comes from the sharp slowdown in imports growth (+1.3% in nominal terms in 2012 after +12.3% in 2011), sharper than the one posted by the growth in exports (+3.2% after +8.4%).

Germany's last balance of payment deficit (the trade balance and the balance of payments with other countries e.g dividends, investment) was in 2000; France has had a balance of payments deficit every year since 2005.  

In 2011 according to the World Bank, Germany's goods and services exports were at a ratio of 50% of GDP (gross domestic product) and the ratio was 27% in France; in 2000 the ration were 33% and 29% and in 1991, the first year of German reunification, the ratios were 26% and 22%.

€140bn of Germany's trade surplus was ex-EU27 or 74.5%; €41bn of the surplus was with non-Eurozone EU countries e.g. UK, Sweden, Poland etc; the surplus with the other 16 Eurozone members was only €7bn.

The Volkswagen-owned unit in Portugal and its SEAT subsidiary in Spain are significant exporters in those countries and their shipments to for example China and the Eurozone excluding Germany, are not included in German data.

It helps to look at markets and distribution of employment.

In many global business sectors, there are just a few dominant players: Industrial chemicals: BASF and Bayer of Germany compete against themselves and their main global rivals are Dow Chemical and DuPont of the US; Smartphones are dominated by Samsung and Apple; Flat screen TVs by Korean and Japanese companies; SAP of Germany, Europe’s only significant software firm competes against Oracle of the US; Volkswagen, Toyota and GM dominate the car market; Siemens of Germany’s main competitor in the supply of conventional power plants, sophisticated healthcare equipment, is General Electric of the US; Big pharmaceutical firms in Europe are concentrated in the UK, France, Germany, Switzerland, Denmark and Sweden, Elan which was founded by an American in Ireland in 1969, has in recent years become almost a shell operation with 150 employees worldwide.

PSA Peugeot Citroën of France has been dependent on the Western European market for 75% of its sales; the bigger Volkswagen Group sells 40% of its output there and a third of 9.3m units in Asia Pacific - - mainly China.

What is interesting about VW’s total average 2012 head count of 550,000 with 237,000 employed in Germany, an additional 173,000 were employed across Europe.

Outside the United States, the global premium car market is dominated by 3 German companies: Audi, BMW, Daimler and Toyota’s Lexus [I’m not including the real pricey market including VW’s Porsche - - Ferdinand Porsche was the founder of VW - - and the Italian sports car manufacturer Lamborghini that has been part of the Volkswagen Group since 1998. Today, some 950 employees work at its headquarters in Sant’Agata Bolognese. In 2012, Lamborghini delivered more than 2,000 vehicles).

Slovakia, the Eurozone country of 5.4m, is home to 3 big plants run by VW, South Korea’s Kia and PSA Peugeot Citroën.

While overall EU exports to South Korea have risen sharply since a free trade deal took effect in July 2011, a jump in SK car exports to Europe has particularly hit PSA Peugeot Citroën models’ markets.

Excluding cars, of the top 250 global consumer product companies by sales revenues (food, drink, consumer electronics, personal care products, watches, clothes), France has 15; Germany 10; UK has 8 (including Unilever, the Dutch-UK group).

Italy has 6 companies on the list and Switzerland 5. However, Nestlé of Switzerland, the world’s biggest food company, is at No. 4 with sales of $95bn in 2011 while Italy’s top company is at 86 with sales of $10bn — it is Ferrero, the maker of Ferrero Rocher chocolates - - an excellent product combined with innovative packaging.

In recent years, the Belgian brewer of Stella Artois beer acquired the American Budweiser brand. It’s easy to understand why Belgian, German, Dutch and Danish beers dominate export markers with Belgium’s Hoegaarden and Germany’s Poulaner wheat beers popular in Asia. It’s also easy to understand why the Chilean and Australian wine industries trump the fragmented mass market wines of France, Spain and Italy. American beers are too bland while Southern Hemisphere wines have more alcohol with grapes that can assure some depth.

… and beyond the big companies, Germany also has the benefit of focused smaller firms according to the Harvard Business Review:

"The amazing resilience of the German economy is often attributed to its reliance on Mittelstand companies, small to medium sized enterprises. These typically family-run businesses employ more than 70% of all German employees in the private sector, and are export-oriented, making Germany the second-largest exporter in the world. There is a wonderful account of these companies in the book Hidden Champions by Hermann Simon, former INSEAD professor and now Chairman of Simon, Kucher & Partners. During a recent presentation at INSEAD Hermann described some of their common features:

Most Hidden Champions are extremely focused in what they do. To give a few examples: Jungbunzlauer supplies citric acid for Cola-Cola worldwide (and a few other salty and sweet chemicals), TetraMin is the number one producer of fish food, Uhlmann is the world leader in packaging systems for pharmaceuticals, and Flexi is the number one manufacturer of dog leashes worldwide.

They do one thing but they do it extremely well by achieving tremendous efficiencies , making them cost-competitive despite their location in a very expensive country.

Due to the simplicity of their product lines, their organizations avoid complexities and intricate structures, resulting in very lean management hierarchies.

To compensate for their razor-thin focus on just a single product (or product category), they diversify internationally and enjoy great economies of scale."

Siemens has 116,000 employees in Germany, 75,000 in rest of EU27, 55,000 in US, 29,000 in China and 18,000 in India.

Nestlé does not for example, continue to enjoy sustained success because of changes in exchange rates or screwing down wage costs - - and that is the key to keep in mind.

German private sector employers incurred an average wage cost (including social security) of €31.00 per hour worked in 2012. Destatis, the federal statistics office says that the labour cost level in Germany thus ranked eighth in the EU. Employers of the German private sector paid 32% more per hour worked than the EU average, but 11% less than, for example, France. Sweden recorded the highest labour costs per hour worked with €41.90 and Bulgaria the lowest with €3.70. The Irish rate was €27.40 and low private sector pension coverage saves Irish employers costs that are borne by employers in other developed countries.

On Germany's borders, Polish costs were €7; Slovakia's €8.60 and the Czech Republic rate was at €10.70.

In the market arena of mobile capital, it’s big name companies that hold the blue chips. Governments and in the US, states and municipalities, competing against each other, pick up the tabs.

The simple point about the German surplus in a Single Market that is riddled with loopholes and where other countries are eager to attract jobs from other member countries, is that fiscal policy changes would only have a limited impact unless a German government was prepared to create disincentives for its big employers to move significant operations elsewhere.

Of course a German government wouldn’t do that and this week General Motors announced it would invest an additional €230m in Opel, its struggling European subsidiary, headquartered in Rüsselsheim, Germany.

The rise in the German export to GDP ratio over the past decade has coincided with rapid growth in countries such as China and German companies have had world-beating products to sell. The data shows that the rest of Europe has gained as well.

Plunge in financial flows

The plunge in cross-border financial flows have had a much bigger impact than trade on the peripheral economies.

The McKinsey Global Institute (MGI) estimates that in the past three years to Q2 2012, private investors have withdrawn some $900bn from Greece, Ireland, Italy, Portugal and Spain.

Despite its superior infrastructure, Greece's inflows of FDI in 2004-2010 were at 1% of GDP compared with 8% in Bulgaria, Romania and Turkey and this disparity likely continues.

The main beneficiaries of greater German demand would be the central European economies closely integrated into Germany’s supply chains, according to European Commission research. Its analysis suggests that a 1% increase in German domestic demand would primarily benefit domestic production, and its effect on the German trade balance would be roughly 0.2% of GDP. It would improve the trade balance of Spain, Portugal and Greece by less than 0.05% of gross domestic product.

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