It’s going to be déjà vu: Germany enjoys yet another fat trade surplus, Donald Trump accuses Berlin of being a glutton at the expense of other countries, and Germany responds, “Back off, we can’t help that our products are so good the whole world wants a bite.”
Economic institutes are currently revising up their spring forecasts for 2018 growth to around 2.5 percent, meaning that Germany could be set for another pot-bellied trade surplus — and more criticism. But it will only give the US president another motive for imposing import tariffs and tucking into a trade war.
German lawmakers and government officials are already dusting off their old arguments, too. “The cause of the surplus is the strong competitiveness of our economy. We can be proud of that,” said Carsten Linnemann, a lawmaker from Chancellor Angela Merkel’s conservatives. The new Finance Minister Olaf Scholz agrees.
The Handelsblatt Research Institute expects export momentum will ease over the coming months, but that's only one side of the story. Import weakness is the other, and the German government, bent on balancing its budget in recent years, has been slow to tackle it. The EU Commission, the IMF, the OECD and even some German economists have criticized that ingredient of the country’s chronic surplus.
While the German current account surplus has fallen from its 2015 peak of 8.5 percent of GDP to 7.9 percent in 2017, domestic appetite remains too weak to slim the trade surplus down significantly.
“The government can try to raise domestic demand by increasing state spending or cutting taxes and contributions,” said Clemens Fuest, president of the influential Ifo economic research institute.
But providing that kind of economic stimulus at the peak of the current upturn would waste money, so Mr. Fuest also suggested whetting corporate investment by offering companies a tax cut that only comes into force two or three years down the road. “That’s the best way to reduce the current account surplus over the medium term,” he explained.
Aside from encouraging firms to be a little less thrifty, the government could invest more cash in deregulating service industries, speeding up approval procedures, building more roads, improving the railway network or bolstering broadband internet.
“The new government urgently needs to improve conditions for private investment in Germany,” said Marcel Fratzscher, head of the Berlin-based German Institute for Economic Research (DIW). “The surpluses in the public budgets are so big that higher public investment can be financed without endangering the balanced budget policy.”
The government has already increased its investment by more than 40 percent in recent years. Federal investment planned for 2018 amount to €36.4 billion ($44.7 billion), rising to €37 billion in 2019. However that won’t be enough.
“We shouldn’t just be looking at the federal government but also at the regional states,” said Peter Bofinger, a member of the Germany’s Council of Economic Experts. He said regional governments have amassed budget surpluses in recent years and instead of paying down debt should be channeling funds to local authorities for investment at their level, too.