Realist, not conformist analysis of the latest financial, business and political news

Gross Ignorance About Trade Surpluses And The German Economy

Pissing the money away By Pbrundel – Own work, CC BY-SA 3.0,

Here we go again, it’s all Germany’s fault. They’re running a trade surplus which means that Gotterdamerung will soon be upon the European economy. Thus some Belgian should tell German companies what to pay their workers.

No. What’s missing here is the most basic, simplest, understanding of the relative size of things.

Germany does indeed have a current account surplus:

The clearest side-effect of Germany’s perennial surplus is that it sucks demand from the European economy. As BMWs, aspirin and industrial robots flow from Germany to the rest of Europe, money flows into Germany. Because Germany imports significantly less than it exports, this money gets stuck, failing to return, for example, as Germans buying Italian goods or Spanish services. The scale of this is astounding. Since 2008, Germany’s surpluses have hoovered an average of €110bn (£94bn) out of the rest of Europe each year, according to data from Germany’s central bank.

Entirely true. Now, how important is that? The EU economy – roughly, just thumb sized measurements here – is €20 trillion a year. Ah, the German current account surplus is 0.5%. Nope, not 50%, half a percent. Not one of those grand and important numbers.

No, really, think about it for a moment. Sure, they’re sucking demand out of other places. But what also sucks demand out? Savings, for savings are what is not spent, right? The household savings rate in the EU is some 11 to 13%. Whatever the effect of the current account surplus it’s one twentieth the size of those savings.

We simply not talking about something important.

This is not the end of their ignorance of relative sizes:

But this economic strategy is no more successful back home. Because Germany imports so little, other European countries cannot earn enough to pay for German exports in a sustainable manner. Instead, this debt is paid by borrowing from, or selling assets to, German lenders and investors. In 2017, for example, households and firms in other EU countries owed half a trillion euros to German banks and their subsidiaries, and the Greek state sold 14 regional airports to the German company Fraport.

OK, yes, current account always is balanced by the capital account because the balance of payments does balance.

This continental imbalance is clearly unsustainable: both stockpiles of assets and the patience of lenders eventually run out. At this point, an “adjustment crisis” will occur: unless Germany is willing to run large deficits to allow other countries to repay their debts, German banks will face losses as loans are written down, and Bavarian factories will idle as customers can no longer afford their orders.


That capital account surplus – because the balance of payments does balance – is of the order of €100 billion a year. The European stock of wealth is some €90 trillion. It rose – just household wealth this is – by €1.1 trillion last year. Germany gets €100 billion of the €1,100 billion increase in wealth? Why does this process need to stop? They continue to run that capital account surplus and end up owning an ever smaller portion of European wealth, right?

Which is why we don’t let Belgians run the European economy of course. They’re too interested in piddley little things to be able to see the bigger picture.

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4 years ago

So the Target2 imbalances within the Euro are irrelevant then?

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