While many of Europe’s weaker economies are under fire for failing to manage ballooning trade deficits, Germany is feeling the heat for its huge trade surplus, with the most recent salvo fired by the US.
President Donald Trump has threatened German carmakers with a 35 per cent tariff on imported cars and called Germany’s attitude to trade “very bad”.
European nations which are struggling under the weight of EU-imposed austerity measures have been emboldened by this US rhetoric, accusing Germany of using the weakened common currency to its exporting advantage, while failing to do enough to stimulate domestic demand.
Former Italian Prime Minister Matteo Renzi wrote in a blog: “The rules say Germany’s trade surplus cannot be higher than 6 per cent [of gross domestic product] and now it is about 9 per cent. This is a violation of the rules that hurts all of Europe and weakens it to the sole benefit of our German friends.”
Is this fair criticism of Germany, or are the critics forgetting the benefit to the European trading bloc of having such a strong and stable partner?
Europe’s industrial powerhouse and the world’s third-largest trading nation certainly has an enviable financial position, with a surplus of 8.3 per cent of gross domestic product in 2016. And there’s no doubt its trade balance has benefited from the weak euro. An International Monetary Fund report in 2014 put Germany’s inflation-adjusted exchange rate at some 5 to 15 per cent below where it should have been for the strength of its economy.
But unlike China, which is able directly to manipulate its exchange rate to benefit its export market, the euro is a freely traded currency shared by some 19 nations with an independent European Central Bank setting policy.
The euro is the world’s second most-traded currency and the euro exchange rate to the dollar is set by markets in more trades than any other currency. That makes it hard to blame Germany for any undervaluation.
It could be argued that indebted nations in southern Europe need to get their financial houses in order rather than cry foul that the euro is at the wrong level to allow them to export their way out of trouble. German Chancellor Angela Merkel told the US at a Group of Seven meeting in Sicily this year that her country’s trade surplus was largely out of her hands, but she’s right only up to a point.
As Europe’s predominant economy, Germany has a strong say in policies that affect the euro. However, any action that brings up the strength of the common currency may help to tame US critics but it would not be in the interests of weaker European nations.
For them, Germany could have been less draconian in its demands for austerity in return for EU funds, showing more empathy and some flexibility.
And the real area where Germany could do more is at home, in particular by encouraging thrifty Germans to get out their wallets and spend. The IMF has warned that German wages need to rise to help sustain the eurozone recovery. Aside from putting more money in German pockets, it will raise manufacturing costs, helping to make other European countries more competitive in comparison. ECB policymakers say wages need to post nominal growth of 3 per cent annually, but the last time that happened was in 2011.
Germany could also use more of its surplus to improve infrastructure and introduce targeted reforms to stimulate spending at home, such as tax incentives for private domestic investment. Marcel Fratzscher, head of the Berlin-based German Institute of Economic Research, told Bloomberg in an interview that there had been a long-term trend of public underspending that has led to an “investment gap” of around 4 per cent of German output, or €120 billion.
Chancellor Merkel says this year she will do more to improve Germany’s ageing road networks and other infrastructure.
And what of the imbalance with the US? There the Germans have cause for grave complaint. German carmakers have quadrupled US production from 2009 to 2016, they employ more than 33,000 Americans and they export some 62 per cent of that production to other markets. While German bashing may be a popular sport, criticisms of its carmakers’ behaviour in the US deserve a sending off.