Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Germany must reduce its current-account surplus

Jan Behringer, Till van Treeck and Achim Truger 11th February 2021

Germany’s sustained current-account surplus is not only bad for others in Europe and beyond—it is bad for almost all Germans too.

current-account balance,Germany
Jan Behringer

The German economy has been running persistently high current-account surpluses for more than 15 years. Over the last decade, the surplus was between 6 and 9 per cent of gross domestic product, mainly because Germany exported much more than it imported. This is a drag on other countries’ exports and employment and can also lead to financial imbalances.

A large majority of economists outside Germany thus see the surpluses as a serious threat to macroeconomic stability. The European Commission, the International Monetary Fund and the United States government have repeatedly called for a rebalancing. So far, however, none of the various German governments in power since the early 2000s has seen the need to take action.

current-account balance,Germany
Till van Treeck

In a recent paper for the Forum for a New Economy we argue that it would be better for Germany finally to find genuine answers as to how the surplus can be significantly reduced. This would not only help current-account deficit countries in Europe and beyond, which could boost their exports and employment as well as reduce their external debt. The vast majority of the German population would also see major benefits from a reduced surplus, which would be accompanied by higher incomes for households and increased public investment.  

current-account balance,Germany
Achim Truger

Three myths

The domestic debate is shaped by three myths, which make the search for ways out more difficult. First, it is often claimed that, historically, export orientation has been an important element of the German growth model. Yet until the mid-2000s Germany’s current-account balance hardly ever exceeded 4 per cent of GDP, from the founding of the German empire in 1871.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Nor can these surpluses be considered as the outcome of an economic equilibrium. In particular, higher precautionary savings driven by demographics—often cited as a crucial factor—explain less than a percentage point of the surplus, according to estimates by the IMF. From the IMF’s perspective, this makes Germany the only large country to have run a permanent, excessive, current-account surplus for many years.

Finally, this cannot be put down to pronounced export strength. The high surpluses are better attributed to below-trend imports. Especially in the first years of the millennium, imports fell dramatically as domestic demand stagnated. The resulting import gap has not been closed since (Figure 1).

Figure 1: real exports and imports (1991=100)

current-account balance,Germany
Source: Federal Statistical Office, authors’ calculations

But how did the stagnation in imports come about? A look at the three domestic sectors—households, corporations and government—which comprise the German economy shows why.

Wage restraint

Households have lost around eight percentage points of national income since the mid-1990s (Figure 2). Initially, in the 1990s and 2000s, they lost out to the corporate sector, whose profits rose mainly due to wage restraint and the expansion of low-wage employment. That sector, however, hardly increased spending but retained a large proportion of profits. This was attractive for tax reasons after the reform of corporation tax in the early 2000s and increased firms’ independence from external financing via capital markets.

Since the 2010s, households have lost income share especially to the government sector. Despite strongly rising tax revenues, however, government has pursued fiscal surpluses rather than investment, due to the German ‘debt brake’ (Schuldenbremse) and the philosophy of balanced budgets (schwarze Null).


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Figure 2: Sectoral incomes as a share of gross national disposable income

current-account balance,Germany
Source: Federal Statistical Office, authors’ calculations

While private households decreased their spending in line with falling incomes, corporations and the government did not use their increasing incomes for higher expenditures in relation to GDP (Figure 3). Because all three domestic sectors therefore systematically spend less than they earn, the German economy accumulates ever higher net foreign financial assets. The average returns on these foreign investments are however disappointingly low.

Furthermore, due to its high export surpluses, Germany is very dependent on what happens outside its borders. Because the high German surpluses are mirrored by high deficits in other countries, a latent danger of debt crises and protectionist trade policies is the consequence. In turn this threatens prosperity and employment in Germany as well.

Figure 3: sectoral expenditures on consumption and investment as a share of GDP

current-account balance,Germany
Source: Federal Statistical Office, authors’ calculations

To reduce the German surplus the import gap must be closed—this means bringing domestic demand and production of goods and services back into alignment. For the overwhelming majority in society, this would be a better use of the strength of Germany’s economy, compared with the accumulation of insecure and low-return financial assets abroad.

Investment orientation

A massive strengthening of public investment, as well as production of public goods and services, will have to play a key role in rebalancing the German economy. There are increasing financial needs, particularly in the socio-ecological transformation and transport infrastructure, as well as in education and health, which should be assuaged step by step, partly financed by public debt. For this, an investment-oriented reform of the debt brake would be helpful.

At the same time, there is considerable leeway for private households to benefit once again more strongly from economic growth. This would increase domestic consumption in relation to exports. One approach to achieving this is through enhancing wages—setting a higher minimum wage, strengthening collective bargaining, reducing working hours with partial wage compensation and improving pay and staffing in the public sector. The other is through progressive reforms of the tax and transfer systems.

With a suitable package of measures, the German current-account surplus could possibly disappear as quickly as it came in the early 2000s. There is no reason why the ‘German growth model’ should not be reversible within a decade—but this does require decisive action.

This article is based on the study ‘How to reduce Germany’s current account surplus?’, commissioned by the Forum for a New Economy and published in January

Jan Behringer, Till van Treeck and Achim Truger

Jan Behringer is head of the economic policy unit at the Macroeconomic Policy Institute (IMK) of the Hans Böckler Foundation, Düsseldorf. Till van Treeck is a professor and managing director at the Institute for Socio-Economics at the University Duisburg-Essen. Achim Truger is also a professor at the institute and a member of the German Council of Economic Experts.

Home ・ Economy ・ Germany must reduce its current-account surplus

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

trade,values,Russia,Ukraine,globalisation Peace and trade—a new perspectiveGustav Horn
biodiversity,COP15,China,climate COP15: negotiations must come out of the shadowsSandrine Maljean-Dubois
reproductive rights,abortion,hungary,eastern europe,united states,us,poland The uneven battlefield of reproductive rightsAndrea Pető
LNG,EIB,liquefied natural gas,European Investment Bank Ukraine is no reason to invest in gasXavier Sol
schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube