In May, for the first time in more than three decades, Germany’s storied trade surplus disappeared. Not only is imported natural gas more expensive, but demand in China is falling — neither of which is good news for Germany. Nevertheless, the fallout will be more manageable than many people expect, the Germans included.
For decades there has been too much emphasis on the importance of the German trade surplus to the country’s prosperity. No one claims to believe in the doctrines of mercantilism anymore, yet they reemerge time and again. To the extent Germany has been a wealthy nation, it is due to its productivity and human capital — not any pattern of trade surplus or deficit.
For purposes of contrast, Australia ran a trade deficit for decades, from 1975 to 2019. During those same years, it evolved into one of the finest places to live in the world.
The most helpful way to think of a trade surplus is as concomitant of a relatively high savings rate, as for instance more spending on foreign goods eventually will turn a trade surplus into a deficit, as has happened with Germany. But a relatively high savings rate isn’t appropriate for every nation at every point in time. Sometimes a country needs to dip into its reserves, as Germany is now doing to meet its energy needs. Losing the trade surplus has no special meaning beyond illustrating Germany’s need to pay more for natural gas.
During the 2011-2012 euro crisis, many commentators viewed the German trade surplus as a virtually automatic source of stable automatic demand, ensuring high employment. But the final determinant of aggregate demand in Germany is the monetary policy of the European Central Bank. If the German trade surplus is high, for instance, but the ECB tightens sufficiently, aggregate demand in the German economy still will fall.
Germany’s move into a trade deficit also induces some offsetting effects, some of which will blunt the initial costs of Germany’s problems. For instance, the value of the euro has been falling relative to the dollar and may soon reach dollar parity. That will make German exports cheaper in many parts of the world, leading to some boost in demand. Those gains probably won’t offset the magnitude of Germany’s energy problems, but they will provide partial insurance for the German economy.
The fall in Chinese demand for German exports, due largely to lockdowns, is unfortunate. But it may be heralding a world that was already on its way. China is a rising manufacturing power at the high end of the quality spectrum, and over time the country will likely be turning to domestic suppliers. China’s Covid Zero policies may have slowed down economic activity and hastened the move away from German exports, but the change is notable more for its timing than its magnitude. Germany now has the chance to adjust sooner rather than later, mostly by cultivating markets in other parts of the world.
And then there is what may be Germany’s biggest problem: complacency. In the last 20 years Germany’s primary education system has had a mixed performance, albeit with some improvements, and its infrastructure is no longer perceived as so efficient or high quality. Yet reform was not imperative, partly because things were going OK enough in Germany.
There is a chance that the current crisis will jolt Germany out of its passivity. Throughout history Germany has managed to reverse some very bad situations, as it did after the devastations of the Napoleonic wars and World War II.
Keep in mind that human capital is the most important determinant of national wealth, much more important than the flows reflected in the trade account in any given month or year. If German reforms boost the ability of the country to train students and to put its people to work, the long-run payoffs could be very high.
Right now Germany is facing many problems all at once: extremely high energy prices, the need to bail out some of its energy firms, the conflict in Ukraine and the resulting promise to boost defense spending, and possible troubles with Italy in the Eurozone over rising borrowing costs. Germany is either going to do very, very poorly, or will muddle through and manage a major turnaround. I would bet on the latter.
In the meantime, it would be a mistake to attach too much significance to the country’s crossing the barrier from trade surplus to deficit. The more relevant question is whether Germany will take this opportunity to set its economy on a more sustainable track.
Bloomberg
