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Surpluses are not that dangerous

| 8 Lesermeinungen

Germany is being criticized for its trade surplus. Let's not forget: Deficits are more hazardous than surpluses. By Patrick Bernau

Germany is being criticized for its trade surplus. Let’s not forget: Deficits are more hazardous than surpluses.

By Patrick Bernau

Now that Greece is on the edge of default and many people are thinking about a fresh start for Greece, Germany is oddly again being criticized for its trade surplus. Ok, we know that Paul Krugman will probably never stop. But now, there is a new wave of criticism from inside Germany. In German language blog posts, Jens Berger and Hans-Christian Müller made the same point after the EU commission had published its “Alert Mechanism Report” and scolded the deficit countries, but not the surplus country Germany.

The Imbalances - Picture: dpa discussion is important, but please let us agree on one basic fact: Trade deficits are more dangerous than surpluses. Deficits cause debt, and we know that debt causes crises. On the other hand, nobody has ever heard of a country getting problems only because it has huge claims. And while it is true that deficits and surpluses have to sum up to zero, the problems associated with imbalances (picture: dpa) always stem from large deficits, while large surpluses are harmless by themselves.

You don’t believe me? Have a look at these examples. For the ease of the calculation, I assume the countries to be of equal GDP.  But the basic situation doesn’t change when GDPs differ.

This situation is potentially dangerous:

Bild zu: Surpluses are not that dangerous

… as well as this one:

Bild zu: Surpluses are not that dangerous

… while this situation is completely harmless:

Bild zu: Surpluses are not that dangerous

The same thing is true for the adjustments: It is absolutely sure that diminishing the deficit of Greece will help Greece. On the other hand, it is unlikely that diminishing the surplus of Germany will be of much help to Greece. Germany’s exports might just be replaced by exports from the Netherlands or France.

There is no way around it: Greece needs to become more competitive. This will mean that some trade balances worsen. If Germany’s surplus decreases, then so be it. But this is not the main aim to strive for. In this case, the EU commission is absolutely right.


Thank you, @DanielDaffke, @mh120480, @StephanEwald, @MTaege, and @ARRRomat for your help with my Twitter question.

“Fazit” is the economics and finance blog of the German national newspaper Frankfurter Allgemeine Zeitung. Occasionally, we publish blog posts in English. You can find our English posts at https://www.fazitblog.de/english. An RSS feed is available at www.fazitblog.de/english/rss. And please follow our English Twitter account @Fazit_Blog.


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8 Lesermeinungen

  1. faz-bern sagt:

    Jangrothe, I don't think...
    Jangrothe, I don’t think Greece can be rescued. I have written about double equilibria on this blog in German – https://faz-community.faz.net/blogs/fazit/archive/2011/11/20/endlich-verstanden-warum-die-maerkte-in-der-euro-krise-so-verrueckt-spielen.aspx -, but Greece has an extraordinary amount of debt.

    Schmeconomics: I never thought Krugman et al. would see the Netherlands too different from Germany. However, they talk about Germany – and I wanted to point out that there would be a need for even more cooperation.
    Of course, nobody explicitly asked Germany to export less. But they want wages to increase, and this will increase the prize of German exports and diminish the amounts. You can’t bring down a surplus only through imports. The trade balance will be diminished from both sides.
    Of course it would be helpful to consume more from the periphery. But this is not something you can enforce in a market economy. Every consumer takes his own decisions, and Greece (and, to a lesser extent, some of the other countries) simply cannot compete. It is just not beneficial for individuals to import from Greece. If we wanted to rescue Greece, almost everybody in the whole Eurozone would need to get a huge wage increase. And even then, I suspect we would rather get more inflation than more imports from Greece.

  2. Patrick, I think you...
    Patrick, I think you misinterpreted some of the basic arguments in the current account discussion.

    First, I doubt that Krugman et al. would argue for Germans to reduce their trade deficits but the Dutch (and the Austrians, to a lesser degree) should continue to accrue high surpluses and even take some of Germany’s share. Yes, in absolute terms has the highest current account surplus of the EZ countries. But relatively, the Dutch surplus (+7,0% of GDP) is higher than Germany’s (+5,2%) – so it would only be fair to include the Netherlands and Luxembourg ( > +7% of GDP). Seeing this as an attack on Germany only seems a little paranoid.

    Second, no one argues that Germany should export less (why would anybody?). Rather Krugman et al. want Germany et al. to import more – and more specifically, import more from the PIGSIs. I know, their products are not really competitive but still, this would help those economies much more than Germany exporting less (again, I don’t know how anybody could argue like this).

    Evidently, the imbalances within the EZ are unsustainably large. And, as much as it may hurt the pride we Germans have in our industry and export might, we have to help the PIGSIs by consuming more. The conditions for them are also clear: they have to reform, be frugal and improve their productivity. But it is of no help for them if the more productive EZ members keep telling them to catch up with Germany et al. while they pace ahead.

  3. jangrothe sagt:

    I disagree with your basic...
    I disagree with your basic fact. Deficits do not cause debt. It’s the other way around: Debt is one’s deficit and the other’s surplus. A debt crisis will harm both sides.
    And a debt crisis is not a crises because debt is bad in itself. It is a crisis because people BELIEVE that debt is bad. The day before the debt crisis broke out, everybody believed that the Greek debt level was no problem. So it was no problem. Then beliefs changed, and now it was a problem even though the debt level did not change dramatically in one day’s course.
    It is all about beliefs and expectations. Admittedly, it’s harder to win back than to ruin a good reputation. But in principle, the Greek crisis could be over in 2 months because beliefs have changed in the meantime.
    And always keep in mind, that there also can be some sort of surplus crisis. A surplus means that domestic capital is not invested domestically: Investments abroad seem more attractive which could imply higher unemployment, low productivity and slow growth domestically.

  4. Detlef1961 sagt:


    I´ve got some...
    I´ve got some problems with your comment? Did I miss part of the discussion?
    1. Where do we (Germany) compete with Greece for example?
    Tourism? No, Greece is competing here with Turkey and Spain.
    Agriculture? Greece is here competing with other Mediterranean countries like Spain or Italy for example.
    Shipping/Shipbuilding? The competition here are Asian countries.
    So how would higher wages in Germany improve the competitiveness of Greece?
    Same for Portugal. There is some competition between Germany and Spain/Italy. Carmakers for example. But of course there are also Skoda, Dacia, Toyota plants outside Germany but inside the EU…
    Not to mention export companies outside the Eurozone or the EU.
    2. Which means that just looking at the Eurozone/EU is simply wrong in my opinion. Higher German, Dutch and Austrian wages wouldn´t necessarily help the Southern Eurozone countries that much. Even if you could somehow force them to do that. How by the way?
    Don´t forget US and Asian competition. I would predict that a good part of the lost German, Dutch and Austrian exports (inside or outside the Eurozone) would be picked up by those countries.
    (That doesn´t mean that I´m against higher wages. If company profits go up employees should “profit” too.)
    3. And someone has to pay for those higher public wages you propose? Who?
    There´s also the problem that higher wages don´t automatically translate into “more money for Greece, Italy, Spain, Portugal and Ireland”. Some of it undoubtly will end there. But if I buy (with my higher wage) more consumer electronics (from LCD TV to tablet PC), smartphones, movie DVDs, clothes and the like, that money will mostly leave the Eurozone. Mostly not manufactured here.
    And if higher public wages result in higher federal taxes and/or local fees, then I´ll get money from the right hand while the left hand then removes it from my wallet again.
    If you simply borrow that money then federal and state budgets probably will get into trouble should interest rates reach “normal” rates like 3, 4 or 5% again. Just look at 2011. Record federal tax revenues, record low interest rates and still a federal budget deficit.
    Although I admit I´m frustrated too.
    Remember the Hartz IV discussions? For months on end? Can the German federal budget survive a raise by Euro 5 per month?
    Spending dozens of billions of taxpayer money on reckless banks however…
    No discussion, there is no alternative. And the so called Greek rescue is in reality a rescue of financial institutions.
    Coupled with ultra-low ECB interest rates to help bank profits. While at the same time hurting ordinary savers.
    Privatize profits, socialize losses seem to be an apt description here.

  5. faz-bern sagt:

    1. No, I don't think it would....
    1. No, I don’t think it would. And the reason for this is …
    2. Germany’s policy of wage restriction was something that every trade union / every worker agreed to. It was their own decision, and they took it because they believed it was in their own interest – workers could secure or even gain a job by accepting lower wages. Now, it is not at all in the companies’ interest to increase wages. (They might be forced to, but this is a different thing.)
    We should keep in mind: It is not countries who compete, but it is companies who compete with other companies within the European Union. Each company will try to keep its wages down. It is the same interest that made Germany’s wage restriction possible.
    And no, I don’t believe companies would follow the public sector. They didn’t do it in 2009, either. Then, the public sector in the “Länder” had a wage increase of 3 percent, but no company followed.

  6. LHugl sagt:

    1. And wouldn't it still be...
    1. And wouldn’t it still be easier to make Netherlands and Austria doing the same as Germany (increase wages) then letting Greece, Portugal, Ireland, Italy and Spain doing the downside adjustment?
    2. I don’t buy that argument at all, mostly for 2 reasons:
    The “Lohnzurückhaltung” since the ’90ies was a chosen policy. So was the negative effect on wages of the labor market reforms. If you can keep wages down by policy choice, you can also make them go up. In fact, we are seeing this already, only to weak. Isn’t it strange how German wages suddenly start to rise more in the last few years, despite the fact the world economy being in a huge crisis?
    And second, the biggest employer is still the government with it’s various levels. If the government would pay -say- 4,5% more next year, don’t you think most of the private sector would follow that route?

  7. faz-bern sagt:

    On our Google+ page, Lukas...
    On our Google+ page, Lukas Hugl says:
    “If you increase German wages and if (!) German exports to outside Europe would suffer from it, the euro would go down increasing the competitiveness of all of Euroland. The big advantage of this solution would be to avoid the increase in debt/GDP for Greece and the others since their GDP wouldn’t decline. Additionally, since it was mostly Germany where wages developed so differently to the rest of the euro-zone, it would make much more sense letting Germany doing the adjustment compared to half a dozen other countries risking their democracy.
    Additionally, higher German wages because of the Euro would be a tremendous help in getting the German people to support the Euro and the EU more….”

    I have several problems with this argument:
    1. If Germany worsens its trade balance, chances are it will be the Netherlands and Austria. who benefit. Greece & co. need to get more competitive, otherwise they won’t even be able profit.
    2. There is no “you” who can increase German wages. Wages are negotiated between employers and employees. Sometimes, this happens for a whole industry, sometimes between a single employer and a single employee. I don’t think that companies will be willing to increase wages, thereby becoming less competitive and, ultimately, having to layoff people.
    tricky1: I don’t deny that imbalances can be dangerous, but they are dangerous because of the debt, not because of credit.

  8. tricky1 sagt:

    Die Argumentation der Linken...
    Die Argumentation der Linken innerhalb eines Landes, dass ein möglichst grosser Teil des frei verfügbaren Einkommens der Reichen an die Ärmeren fliessen müsse, wird jetzt einfach auf die Euro-Gemeinschaft der Staaten übertragen.
    Der Überschuss an sich ist nur insofern direkt gefährlich als er zu riskanteren Spekulationen und Verlusten verführen könnte.
    Indirekt führt das Ungleichgewicht aber zu den jetzt sichtbaren Spannungen und Begehrlichkeiten und ich wage zu behaupten, dass Deutschland am Schluss einen überproportionalen Anteil der Eurokrise finanzieren muss, trotz allem Sträuben des Parlamentes (Target2 & Co. lässt grüssen).

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