The origin Germany’s trade surplus is often presented as an accounting problem, or better yet, geopolitical. However, very few analysts get see Germany’s imbalance as the impact of domestic stagnation. Allow me to explain.
If Mediterranean littoral nation states actually resolved their productivity problem, German imbalances would remain. As it stands now, German surplus is 8% of its GDP, making it the highest on the planet, even outpacing China. Because trade within the eurozone happens within the confines of a single currency, nation states don’t have the luxury of having multiple monetary policies adjusting relative exchange rates. The best place to view Germany’s current account surplus is to watch capital outflows, especially the operating fiscal environment.
Most analysts would view German capital outflows as an impact of weak domestic investment. But why is that the case? The stagnation really is social, political.
German productivity growth is actually relatively low; the source of Berlin’s problem is the dearth of domestic opportunity for growth, and the solution to this problem is an election.
Because Merkel is running again, we can expect the German domestic demand to remain tepid. The solution is political leadership pushing stronger consumption and private investment. The German surplus is a reflection that citizens will not ratify Merkel’s domestic policy, this is why Germany isn’t leading on any front.
The source of Germany’s current account imbalances is political and social. It will continue until Germany decides to back a different political player.