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German trade surplus sparks concern at home and abroad

Donald Trump is not alone. When the US president complained, just before taking office, at the size of his country’s trade gap with Germany, he highlighted an issue that has long been the source of irritation in Washington and beyond.

It is a topic that is now also stimulating debate within Germany — with possible consequences for the country’s trade ties with the rest of the world and the workings of the global economy.

Recent proposals by the two main protagonists in Germany’s suddenly competitive general election race could finally begin to reduce the trade surplus that has alarmed the rest of the world, by using some of the country’s booming tax receipts to boost domestic demand.

Away from the headlines, German economists are also raising their concern about the disparity between soaring exports and relatively modest imports, an imbalance that is intimately connected to the country’s high savings rate.

But the discussion is also running into deeply held beliefs about how to run the economy. “Many here see Germany’s current account surplus not as an economic concept, but a moral one,” said Marcel Fratzscher, head of the Berlin-based DIW think-tank.

Mr Trump’s criticism, idiosyncratically expressed, was Germany was a “great manufacturing country” that had been “very unfair to the US” since trade between the two countries is so uneven. German exports to the US outpaced US exports to Germany by $65bn last year, though Mr Trump quoted a much larger, incorrect figure of $800bn.

Peter Navarro, Mr Trump’s top trade adviser, has subsequently accused Berlin of using a “grossly undervalued” euro to “exploit” the US and its EU partners.

Overall, Germany posted a 2016 trade surplus with the rest of the world of €253bn, breaking the previous year’s record.

The country’s current account surplus — a broader measure that in effect tracks the stock of excess savings that countries export elsewhere — is expected to have reached more or less the same level, at above 8 per cent of gross domestic product for the year.

The European Central Bank and the International Monetary Fund have expressed alarm at a gap that risks stoking global economic imbalances and the risk of debt-fuelled financial crises.

“There is simply not enough demand for capital elsewhere in the world to absorb that excess saving without declining returns,” Mario Draghi, ECB president, said last year, alluding to Germany’s string of hefty current account surpluses. He maintained Berlin was therefore in part responsible for the low interest rates many Germans loathe.

It is not an argument that easily wins over German public opinion. “Debt is bad and to explain that Germany’s savings is someone else’s debt is difficult,” said Mr Fratzscher.

He added that the fundamental cause of imbalance was not Germany’s high exports but a lack of spending within the country: “You need to raise demand, and to do that you need to create policies to increase private investment.”

But attitudes may be changing as debate stirs over another record surplus — the healthy state of Germany’s budget.

In 2016, the government received €23.7bn more in tax revenues than it spent. The fiscal surplus, the highest since reunification, has led to calls for tax cuts and higher public spending — both demand-boosting policies that could lift imports and narrow the trade gap.

Ahead of the September elections, Chancellor Angela Merkel’s Christian Democrats have promised tax cuts. Horst Seehofer, leader of the CDU’s Bavarian sister party, the CSU, has called for “the greatest tax reduction in Germany history”, albeit at the expense of government spending.

By contrast, their rival Social Democrats want to use the surplus to boost spending. “We need the money for training, for education and investment,” Martin Schulz, the SPD’s candidate for chancellor, told the Passauer Neue Presse last week.

Such policies would only go so far towards righting Germany’s imbalances with the rest of the world, since the country’s fiscal surplus is less than a tenth of the trade surplus. But signs the electorate has grown weary of frugality could change the terms of the debate.

Some German economists, such as Hans-Werner Sinn, who served as president of the Ifo Institute for Economic Research until last year — are also raising the alarm.

Mr Sinn, one of the country’s most famous economists, believes like Trump administration officials that the euro is too weak for Germany. His solution to closing the trade gap is to break up the single currency area.

Such a prescription is relatively extreme within the German debate, but more mainstream economists are also increasingly concerned by the sheer scale of the country’s imbalance with the rest of the world.

“With an ageing population, it makes sense for Germans to save a lot,” says Clemens Fuest, Mr Sinn’s successor at Ifo, referring to high domestics savings’ role in limiting imports and boosting trade and current account surpluses.

“The question is whether a surplus of 8 or 9 per cent is appropriate.” It is a question today being asked in not just Washington but in Berlin — and throughout Germany.

Via FT