Don’t Worry, Germany: Export All the BMWs You Want!

Over the past few months, there has been an increasingly noisy public debate about Germany’s growing current account surplus.

Other European countries, the United States, as well as the IMF have recommended that the German government reduce this surplus. Otherwise recovery is that much harder for the so-called deficit countries.

Most German economists and certainly the Merkel government countered these recommendations with a vigorous defense of German exports.

In particular, they rejected any implicit or explicit notion of voluntary export restraints. Those were used, for example, via as the “voluntary” caps on Japanese car exports to the United States that Japanese automobile manufactures agreed to in the 1980s under intense pressure from the Reagan Administration.

Misleading the public

However, this riposte from the German side completely misses the point. Nobody has really asked for Germany to take such steps. More importantly, the phalanx of Germany’s politicians, feeling the urge to defend Germany’s export prowess, are also misleading their constituents.

How so? They fail to acknowledge that the required actions to bring down the current account surplus, as suggested by the U.S./IMF/EU triumvirate, might allow Germany to sell even more cars, precision tools or medical equipment abroad.

This is because, in strictly economic terms, the current account deficit (or surplus) of any country is always equal to its so-called savings/investment gap. In other words, Germany’s projected 2013 surplus of exports over imports equal to 7% of GDP is identical to its surplus of savings over investments.

To find a proper balance, Germany must pursue the right mix of consuming more and increasing domestic investments.

The working poor

But there are serious impediments for Germany to do either without a major change in policy. Labor market reforms aimed at making Germany more competitive have created a new German economic underclass. It is, in effect, unable to increase its level of consumption.

At the same time, investments, especially by the public sector, have been severely constrained by Chancellor Merkel’s rigid pursuit of fiscal austerity.

The labor reforms introduced by Gerhard Schröder – often hailed by Merkel as a model for all of Europe – have left one quarter of the German workforce holding so-called mini, part-time or other low-paying jobs.

As hard as people try to find jobs – because unemployment benefits have also been sharply reduced – what good does it do them to find work if these jobs do not pay a living wage? Without a minimum wage, this large chunk of German workers cannot add to its consumption and hence help reduce the country’s savings overhang.

Higher wages with continued flexibility

Therefore, corrective actions must be taken in order to raise wages, while protecting the gains made in labor market flexibility. Higher wages for low-paid workers will allow them to consume more and consequently reduce Germany’s savings rate as well as its current account surplus.

And, in fact, some corrective action is likely following the ratification of the coalition agreement between Chancellor Merkel’s conservative party and the Social Democrats. It provides for the first-time adoption of an hourly minimum wage in Germany of €8.50 ($11.55) starting in 2015.

True, there are some escape clauses for employers to negotiate until 2017. Moreover, the agreement would seem to leave untouched the existence of so-called “mini jobs.” Employers could also still shift more workers to less paying part-time jobs. Nonetheless, a start has been made.

However, the current account surplus cannot be reduced to a more reasonable level by lowering German savings rates alone. Germany must also invest more domestically.

Underinvestment

Germany’s self-imposed fiscal austerity has come at a steep price. The German Institute of Economic Research (DIW) recently reported that Germany’s private and public sectors have underinvested in infrastructure, education, plants and machinery for years, depressing German productivity.

Aggressive public sector investments in crumbling roads and bridges as well as education, ending excessive austerity, would guarantee that the German private sector can increase future productivity. It would also allow the country to stay competitive without succumbing to the unsavory alternative of further increasing the number of the working poor.

In fact, the pickup of domestic demand that would be the consequence of such public sector investments would likely cause the private sector to invest more as well. Unfortunately, the new coalition agreement falls largely silent on this important subject.

Win-win scenario

Still, such increased investments would have the added benefit of reducing the country’s much criticized current account surplus. And rather than pulling back on exports, German manufacturers could perhaps even continue to increase their sales abroad.

Domestic policy shifts aimed at low-paid jobs would likely have little dampening effect on exports, in part because Germany’s strongest export products are high-end goods and services – e.g. the aforementioned cars, precision tools and medical equipment. The firms making them rarely employ low-wage workers anyway, given the required skill sets. So, it’s a win-win.

In stripping away the simplistic rhetoric on this subject, it should be obvious to all German politicians that reducing the German current account surplus does not simply benefit deficit countries, but that it is primarily in the German national interest.