Has Germany’s current account surplus always been that large? Where did it come from? Should we worry about the imbalance at all? If so, then how could Germany reduce its large trade surplus? Now, three researchers from Universität Duisburg-Essen and Institut für Makroökonomie und Konjunkturforschung bring us one step closer in answering these questions.
It’s the imports, stupid!
Achim Truger, Jan Behringer and Till van Treeck provide a historical narrative on the evolution of Germany’s current account and guide us through the most recent theoretical literature on current account imbalances. The authors thereby dispel some of the most common myths in the debate and show that the surplus does not primarily come from its much-acclaimed overachievement in the export sector. Instead, the blame is put on the corporate sector, which increased its profits, but failed to spend the additional money on goods and services. The current account surplus originates from a suppression of imports by constraining household spending.
What it means for the future of US-German trade relations
One of the strongest critiques of Germany’s surplus came from the other side of the Atlantic. The USA has to grapple with a massive current account deficit for decades now and renowned economists such as David Autor have shown that import competition was a decisive factor in the 2016 election of Donald Trump. No surprise then that Trump constantly attacked Germany for its trade surplus. This will hardly change under incoming President Joe Biden, as Achim Truger, Jan Behringer and Till van Treeck argue in an soon to be published article for Sueddeutsche Zeitung, which is based on the Forum New Economy Working Paper.
The complete study is available as a Forum New Economy Working Paper – below. The study was first discussed at our VII. New Paradigm Workshop at the end of September 2020 in Berlin. The recording of the presentation and comments by Ludovic Subran, Matthew Klein and Heike Joebges can be found further below.