German current account surplus raises protectionist risk
Euro weakness and underinvestment could spur trade backlash
US President Donald Trump has brought trade into the center of a global debate. Almost every country with a significant current account surplus with the U.S., including Japan, has been criticized by the new administration.
Germany is no exception. The heart of U.S. complaints against Germany is that it runs too large a current account surplus and is unfairly competitive, as its currency is the euro, the value of which is weighed down by less competitive economies than Germany. The rebuttal to this is that while the level of the euro may be too weak for Germany, it is too strong for the weaker euro members, thereby offsetting its impact on the U.S.
Germany is supercompetitive. The International Monetary Fund's 2016 Article IV report concluded that Germany's real effective exchange rate was about 10-20% undervalued and Bank for International Settlements data show Germany's real exchange rate has depreciated by 16% since 2010. It is perhaps therefore no surprise that real exports as a percentage of German gross domestic product have risen from under 25% in 1998 to almost 50% today. The corresponding figures for Japan are from 9% to 16%, and for the U.S. from 12% to 17%.
In 2016, the German current account surplus was the largest in the world at about $286 billion, exceeding that of China, at $210 billion. Germany has long run a current account surplus, interrupted for a while after German reunification. Since the euro was founded, the surplus has been on an upward trend, reaching 8.5% of GDP in 2016. Prior to the eurozone crisis in 2009, Germany's surplus was offset by other countries in the bloc that ran large deficits, meaning that the eurozone was in balance from 2002 to 2011. The eurozone had an imbalance problem, but globally it was balanced.
The eurozone crisis changed that: In the eurozone economies outside Germany, domestic demand was squeezed and current accounts improved massively. The German surplus did not shrink, however, resulting in the eurozone moving from balance to a significant surplus with the rest of the world, amounting in 2016 to 3% of GDP.
What are you selling?
The classic German response to the accusation that the surplus is too big is that it reflects structural factors, including an aging population, meaning that savings exceed investment. This is a nice accounting explanation of the surplus -- in national accounts terms the current account balance of a country is identical to the difference between national savings and national investment -- but it provides little economic insight. Many other countries have similar demographics but lack Germany's 8% of GDP current account surplus.
Germany's much-undervalued real exchange rate boosts exports and profit margins, resulting in substantial private-sector savings. The cheapness of the exchange rate creates strong economic activity and allows a very healthy budget balance. Germany had a budget surplus of 0.7% of GDP in 2015 and 0.8% of GDP in 2016. This means the government's current operations -- i.e., before investment -- showed a bigger surplus. Public investment in Germany is so weak that after allowing for depreciation, the public capital stock has in fact been shrinking; infrastructure is decaying.
In broad terms, Germany is running a tight fiscal policy but a slack monetary policy, which is a classic recipe for a weak currency and a healthy current account. However much Germany protests, this is a global problem. The counterpart to excessive German surpluses is insufficient demand in the rest of the eurozone and excessive current account deficits and excessive debt accumulation elsewhere. Germany's surplus shows it is contributing less to global demand than it is to global supply. In an era of near-zero interest rates and far-from-absent deflationary risks, this is of deep concern.
We very much support free trade and oppose protectionism. But if Germany fails to address its surplus, which, we repeat, is a global issue, not a solely German one, protectionism tensions could well be the result.
Paul Mortimer-Lee is global head of market economics at BNP Paribas in New York.