export surplus No Surplus of Options

Competitors are complaining about Germany's trade surplus. But the German government insists there's nothing it can do to roll back, even if it wanted to.
German is exporting too many cars for the liking of many other countries. But what can the government do?

Germany has long been the subject of criticism – and envy – from other countries thanks to its high export surplus. Until now, the federal government has typically let the reproaches slide off its back, but that is about to become much more difficult.

With the election of Donald Trump as the U.S. president, Germany now has a new trading partner as loud as it is powerful. When Germany hosts a G20 summit of world leaders this summer, instead of being recognized as a great host, it runs the risk of being regarded as an international bogeyman.

But what can Germany actually do about it? The answer, at least according to Germany's finance ministry, is almost nothing.


That was the argument made by the finance ministry in a preemptive strike against its critics last week. A nine-page memorandum by Finance Minister Wolfgang Schäuble's team of experts, seen by Handelsblatt, refers to the U.S. criticism that Germany is exploiting its trading partners as “bizarre.”

To make its case, the ministry essentially went through the various demands made of Berlin by foreign capitals point-by-point. The matter of lowering the surplus – which reached a new record of €252.9 billion, or $270.5 billion in 2016 – is really out of the federal government's hands.

Excessive wage increases could cost jobs, weakening domestic demand and being generally counterproductive. Internal memorandum, German finance ministry

It starts with the most common and automatic correctional mechanism for trade surpluses – increasing the value of the currency. A stronger euro would increase the price of German goods in export markets, and make imports cheaper. The country's record trade surplus suggests the value of the euro is too low, or too low for Germany in any case.

Doing something about it is not an option. The weak euro is largely due to the expansive monetary policies of the European Central Bank (ECB), not the policies of the German govern

Another way to reduce the surplus: raising wages. That would make German exports more expensive and boost domestic demand. But this too isn't really something Berlin can do on its own. Aside from the public services sector, the government has no influence over employees' salaries. Wage bargaining happens independent of the government in Germany, with deals negotiated every year across each sector between unions and businesses.ment. Indeed Mr. Schäuble's team stressed that they would welcome the ECB gathering up the monetary policy reins and pulling back on them by raising interest rates. But, they note, because the central bank is independent, they are powerless to force it into action.

And it's not like salaries aren't already going up. The memorandum noted that wages in Germany are already “rising faster than in most other E.U. countries." If they were to rise even more strongly, Mr. Schäuble's civil servants fear an opposite, dampening effect on the country's economy. “Excessive wage increases” could cost jobs, thus weakening domestic demand and being generally “counterproductive,” the memorandum said.

Another piece of advice that Mr. Schäuble's international counterparts and organizations like the International Monetary Fund are constantly offering him: save less and invest more in things like infrastructure. According to the ministry paper, that's already being done, too: In 2016 government investments increased by 6.7 percent. That's much stronger than total government spending.

Trade surplus German exports imports balance current account 13 p10 German Foreign Trade-01

Critics ask, why not increase investments further? After all, many economists argue that Germany has plenty of pent-up demand, and Mr. Schäuble has the money. In 2016 the treasury had a surplus of €6.2 billion.

But Mr. Schäuble's surplus looks so big partly because he just couldn't get rid of the money. Several billion that had been earmarked for broadband expansion and school renovations weren't called upon by various municipalities, because building authorities have had trouble keeping up with construction.

And even if there was more construction capacity, higher investment would not be much more than a drop in the bucket. In their memorandum, Mr. Schäuble's team cites a calculation from the European Commission, which states that even if Germany's government increased investment by €30 billion ($31.9 billion) annually – an amount considered unrealistic in Berlin – it would only reduce the current account surplus by 0.2 percentage points.

That leaves one more possible course of action: lower taxes. That would put more money in people's pockets, pushing up consumer demand, boosting imports and shrinking the surplus. But Mr. Schäuble argues his wiggle room here too is limited, mainly by a "debt brake" that requires the federal government to balance its budget. Even if Mr. Schäuble had exhausted the 2016 surplus and used up the excess €12 billion in debt leverage, he could have only brought taxes down by a maximum of €18 billion – a paltry sum when compared to an export surplus of €270 billion.

To cut a long story short, according to Mr. Schäuble's team, Germany's current account surplus is structural. Goods with “Made in Germany” tags are simply in high demand. In addition to that, a country facing an aging population, like that of Germany, has little choice but to save now in order to cover the costs stemming from those changing demographics. Such retirement savings account for around 3 percent of the export surplus.

Even the British publication The Economist, which has long been critical of Germany's fiscal policy, acknowledges that Germany's current account surplus will only sink significantly when the country's population has aged further. Only then will Germany's seniors begin to eat into their savings.


Martin Greive and Jan Hildebrand lead financial and political coverage for Handelsblatt in Berlin. To contact the authors: [email protected] and [email protected]