The empire strikes back: why Germany's exports and current account surpluses benefit other countries.

Author:Schuknecht, Ludger

Whenever economists are barking up a tree, it is worth asking whether this profession so prone to herd mentality got the right tree. Over recent years it has become a favorite pursuit of part of the economic commentariat and certain institutions to chide Germany over its current account surplus. Europe's largest economy, so the chorus goes, is pursuing "beggar-thy-neighbor" policies, thereby "destroying demand and taking away jobs elsewhere." Worse, being a notorious exporter, Germany apparently also forces its wrong approach onto others. Under German influence, the argument runs, the eurozone unfairly projects its own adjustment on the rest of the world, with the result being a "creeping onset of deflation, mass joblessness, thwarted internal rebalancing, and over-reliance on external demand."

Germany's example is seen as spreading a dark cloud of bad consequences: "There isn't enough spending. Many policymakers still don't get it." And, again, appeals to fix things invariably turn to the European Central Bank: "Can Draghi get Germany to spend?"

The quotations above are from the Financial Times, the Wall Street Journal, and the New York Times, though there are many others in this chorus, among them certain international institutions. Add to this the view that the Germans are too unintelligent to invest the money they "extracted" from deficit countries (the "stupid bankers from Dusseldorf'), and it is understandable that a lay person might think that the Germans have got economics completely wrong.

Much of the criticism of Germany is based on a Keynesian view of the world where growth comes from demand and global demand is a zero sum game. In this view, macroeconomic fine-tuning is used so as to "rotate demand," as the International Monetary Fund likes to put it. But is it as easy as that? I don't think so.


Let's start with a summary of what German current account surpluses are not: They are not harmful. They are not the result of policy distortions such as manipulated exchange rates or export subsidies. They do not aim at amassing foreign reserves in the Bundesbank's coffers. They do not come about because German industries are somehow protected from foreign competition. They do not result from German workers being paid unfairly low wages.

German exporters meet the demand of the global market fairly and competitively. This came about as the result of efforts by the private sector and at times controversial government reforms after the German economy went through a rough patch in the 1990s. But even more important: Germany's exports not only benefit Germans, they very significantly benefit other countries as well--in at least three ways. This side of the story is rarely told.

First, Germany's strong export growth has been coinciding with more or less equally strong import growth in recent years. Since David Ricardo, few people have denied that trade boosts welfare and growth. Put simply, Both sides benefit. Germans benefit from buying Chinese consumer electronics while the Chinese benefit from German cars.

Second, the export of German capital goods and even more the creation of value chains via foreign production and joint ventures have helped the development of industry within and the transfer of know-how to many emerging economies. Workers in Poland, Korea, and many other countries would certainly not be amused if Germany suddenly told them, "Sorry, our trade surplus is too high; we cannot supply you with machines anymore." By the way...

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