HAMBURG – For US President Donald Trump, the measure of a country’s economic strength is its current-account balance – its exports of goods and services minus its imports. This idea is of course the worst kind of economic nonsense. It underpins the doctrine known as mercantilism, which comprises a hoary set of beliefs discredited more than two centuries ago. Mercantilism suggests, among other things, that Germany is the world’s strongest economy, because it has the largest current-account surplus.
In 2016, Germany ran a current-account surplus of roughly €270 billion ($297 billion), or 8.6% of GDP, making it an obvious target of Trump’s ire. And its bilateral trade surplus of $65 billion with the United States presumably makes it an even more irresistible target. Never mind that, as a member of the eurozone, Germany has no exchange rate to manipulate. Forget that Germany is relatively open to US exports, or that its policymakers are subject to the European Union’s anti-subsidy regulations. Ignore the fact that bilateral balances are irrelevant for welfare when countries run surpluses with some trade partners and deficits with others. All that matters for Trump is that he has his scapegoat.
Back in the real world, the explanation for Germany’s external surplus is not that it manipulates its currency or discriminates against imports, but that it saves more than it invests. The correspondence of savings minus investment with exports minus imports is not an economic theory; it’s an accounting identity. Germans collectively spend less than they produce, and the difference necessarily shows up as net exports.
Germany has a high savings rate for good reason. Its population is aging more rapidly than most. Its sensible people are sensibly saving for retirement. They are accumulating assets now so they can de-accumulate them later, when old-age dependency ratios are higher.
This is why the advice German leaders receive from White House advisers and even from some German economists – that Germany would be better off abandoning the euro and letting its currency appreciate – makes little sense. Changing the exchange rate would not diminish the incentive for Germans to save.
Moreover, allowing the exchange rate to appreciate would discourage investment in capital-intensive traded-goods sectors. To be sure, a stronger currency might increase investment in services by raising the relative price of nontraded goods. But the incentive to invest in services would have to be boosted massively, given that the sector is not capital intensive, to offset lower investment in export industries.
