The “German Problem” Is Not A Problem For Anyone To Worry About. Or Is It?

It took a very long time. Too long. But just in time for the recent G20 meeting in Hamburg on July 7-8, The Economist’s cover page story featured Germany’s persistent current account surpluses as the world community’ new “German problem”; supposedly an issue of foremost interest to the G20. In fact, Germany has run up current account surpluses exceeding 4 percent of GDP in each and every year since 2004. For the last couple of years, Germany’s surpluses even exceeded 8 percent of GDP. Running at over 250 billion euros annually, Germany is the world champion in what is often portrayed as a global competition by the German media and body politic, and not without pride. At close to 300 billion US dollars last year, China’s surplus of 200 billion dollars only came in as a distant second.

Just as with Germany’s, China’s external surpluses had started to skyrocket at the time of the global boom of the 2000s. It reached a peak at over 400 billion in 2008, amounting to close to 10 percent of China’s GDP at the time. Since then China’s current account surplus has roughly halved and amounts to less than 2 percent of China’s GDP today.

At least in that regard, China is a good global citizen. Reducing and containing “global (current account) imbalances” has indeed been one of the agreed upon objectives of the G20 from the time the group of leading countries took fresh prominence in the context of the global crisis. At the 2009 Pittsburgh summit, the G20 leaders conceived the group’s “Framework for Strong, Sustainable, and Balanced Growth.” While other countries have generally significantly reduced their current account deficits or surpluses, respectively, since the crisis, Germany is the conspicuous outlier as the country’s current account surplus has leaped into its unchallenged lead position of today.

The Economist was rather late in pointing this out so prominently on its cover page just prior to the G20 Hamburg summit. Perhaps it is too hard today to miss the writing on the wall that is a signature piece in Donald Trump’s “America first” strategy to global issues. The US president may get some of the details wrong about Germany’s trade and may also be wrong in bringing a sharp bilateral angle to the matter. But, globally, the situation is simply undeniable: Germany is the world champion of large and persistent current account surpluses. The country is in continuous breach of the “rules of the game” without showing any signs of discomfort about an “achievement” that much of the country even takes pride in.

There are of course no such agreed and legally enforceable rules in place at the global level. When Secretary of the Treasury Timothy Geithner back in 2010 proposed a G20 agreement to cap current account imbalances at 4 percent of GDP, Chancellor Angela Merkel rejected this outright. She argued that in view of the European “single market,” the whole European Union should be treated as a unity and that member states’ national trade imbalances were “not meaningful” anymore. In her view, the whole idea of setting specific targets for external imbalances was “too narrowly conceived” (see here, here, and here); which contrasts rather curiously with Germany’s notorious insistence on very specific targets for maximum levels of budget deficits for eurozone member countries.

Perhaps Merkel’s excuse made at least some sense prior to the global crisis when 80 percent of Germany’s current account surplus had its counterparts within the EU and roughly two-thirds within the eurozone, which, overall, had a balanced current account position (see here and here). The excuse would have made even more sense if the EU and eurozone authorities had subsequently shown some real skills and competence in handling the eurozone crisis, preventing that crisis from having such a massive impact on the global economy. The eurozone crisis squeezed Germany’s regional surpluses vis-à-vis its European partners, but the country’s external surpluses with the rest of the world surged simultaneously (see here and here).