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- 1 -Prof. Dr. Rainer Maurer

Digression: Are Germany's Trade Surpluses

Unsustainable for Other Countries?

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- 2 -Prof. Dr. Rainer Maurer

➤ Criticism from the French minister of finance Christine Lagarde:■Germany's trade surpluses

(= X-M > 0) are "unsustainable" for other countries.

■Germany's trade surpluses are built on "too low wages".

■Germany should boost domestic demand to "help deficit countries regain competitiveness and sort out their public finances".

Digression: Are Germany's Trade Surpluses Unsustainable for Other Countries?

"Could those with surpluses do a little something? It takes two

to tango."

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- 3 -Prof. Dr. Rainer Maurer

➤ What is the relationship between trade surpluses and domestic demand?■Expenditure account of GDP:

Y = Consumption (C)

+ Gross Investment (I)

+ Government Consumption (G)

+ Exports (X) – Imports (M)

Y = C + I + G + X – M

<=> Y - C - I – G = X – M

=> (Y - C↑ - I ↑ – G ↑ ) ↓ = (X – M) ↓

Digression: Are Germany's Trade Surpluses Unsustainable for Other Countries?

Domestic Demand ↑ Trade Surplus (Net Exports) ↓

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1970 1975 1980 1985 1990 1995 2000 2005

Net Investment

Structure of German GDP by Expenditure (in Percent of total GDP; Current Prices)

in % des BIP

17,4%10,0%

Private Consumption (C)

Government Consumption (G)

Exports ./. Imports (X ./. M)

Depreciation

1,8%

- 4 -Prof. Dr. Rainer MaurerSource: SVG, Jg. 2004/5; 1) Including Change of Stocks

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- 5 -Prof. Dr. Rainer Maurer

Digression: Are Germany's Trade Surpluses Unsustainable for Other Countries?

➤ What are the reasons for Germany's trade surplus?

■Why have other countries a lower trade surplus?

■A comparison of GDP by the expenditure account provides some useful insights, as the following tables show:

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- 6 -Prof. Dr. Rainer Maurer

EU (26 c.) excl. Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 59% 58% 58% 58% 58% 58% 57% 58% 58% 58%Government Consumption 20% 20% 21% 21% 21% 21% 21% 21% 21% 23% 23%Gross Investment 21% 21% 20% 20% 21% 21% 22% 23% 22% 19% 19%Exports 37% 36% 35% 34% 35% 36% 38% 39% 40% 35% 36%Imports 36% 36% 34% 34% 35% 37% 39% 40% 41% 35% 35%Trade Surplus = Net Exports 0% 0% 1% 0% 0% -1% -1% -1% -1% 0% 0%Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 60% 59% 59% 59% 59% 58% 57% 56% 59% 58%Government Consumption 19% 19% 19% 19% 19% 19% 18% 18% 18% 20% 20%Gross Investment 22% 19% 17% 17% 17% 17% 18% 18% 19% 17% 17%Exports 33% 35% 36% 36% 38% 41% 45% 47% 47% 41% 41%Imports 33% 33% 31% 32% 33% 36% 40% 40% 41% 36% 37%Trade Surplus = Net Exports 0% 2% 5% 4% 5% 5% 6% 7% 6% 5% 5%France 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 56% 56% 56% 56% 57% 57% 57% 57% 57% 58% 58%Government Consumption 23% 23% 23% 24% 24% 24% 23% 23% 23% 24% 24%Gross Investment 20% 20% 19% 19% 20% 20% 21% 22% 22% 19% 20%Exports 29% 28% 27% 26% 26% 26% 27% 27% 26% 23% 23%Imports 28% 27% 25% 25% 26% 27% 28% 28% 29% 24% 24%Trade Surplus = Net Exports 1% 1% 2% 1% 0% -1% -1% -2% -2% -1% -1%

Comparison: GDP Expenditure Account

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- 7 -Prof. Dr. Rainer Maurer

EU (26 c.) excl. Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 59% 58% 58% 58% 58% 58% 57% 58% 58% 58%Government Consumption 20% 20% 21% 21% 21% 21% 21% 21% 21% 23% 23%Gross Investment 21% 21% 20% 20% 21% 21% 22% 23% 22% 19% 19%Exports 37% 36% 35% 34% 35% 36% 38% 39% 40% 35% 36%Imports 36% 36% 34% 34% 35% 37% 39% 40% 41% 35% 35%Trade Surplus = Net Exports 0% 0% 1% 0% 0% -1% -1% -1% -1% 0% 0%Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 60% 59% 59% 59% 59% 58% 57% 56% 59% 58%Government Consumption 19% 19% 19% 19% 19% 19% 18% 18% 18% 20% 20%Gross Investment 22% 19% 17% 17% 17% 17% 18% 18% 19% 17% 17%Exports 33% 35% 36% 36% 38% 41% 45% 47% 47% 41% 41%Imports 33% 33% 31% 32% 33% 36% 40% 40% 41% 36% 37%Trade Surplus = Net Exports 0% 2% 5% 4% 5% 5% 6% 7% 6% 5% 5%France 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 56% 56% 56% 56% 57% 57% 57% 57% 57% 58% 58%Government Consumption 23% 23% 23% 24% 24% 24% 23% 23% 23% 24% 24%Gross Investment 20% 20% 19% 19% 20% 20% 21% 22% 22% 19% 20%Exports 29% 28% 27% 26% 26% 26% 27% 27% 26% 23% 23%Imports 28% 27% 25% 25% 26% 27% 28% 28% 29% 24% 24%Trade Surplus = Net Exports 1% 1% 2% 1% 0% -1% -1% -2% -2% -1% -1%

Comparison: GDP Expenditure Account

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- 8 -Prof. Dr. Rainer Maurer

EU (26 c.) excl. Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 59% 58% 58% 58% 58% 58% 57% 58% 58% 58%Government Consumption 20% 20% 21% 21% 21% 21% 21% 21% 21% 23% 23%Gross Investment 21% 21% 20% 20% 21% 21% 22% 23% 22% 19% 19%Exports 37% 36% 35% 34% 35% 36% 38% 39% 40% 35% 36%Imports 36% 36% 34% 34% 35% 37% 39% 40% 41% 35% 35%Trade Surplus = Net Exports 0% 0% 1% 0% 0% -1% -1% -1% -1% 0% 0%Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 60% 59% 59% 59% 59% 58% 57% 56% 59% 58%Government Consumption 19% 19% 19% 19% 19% 19% 18% 18% 18% 20% 20%Gross Investment 22% 19% 17% 17% 17% 17% 18% 18% 19% 17% 17%Exports 33% 35% 36% 36% 38% 41% 45% 47% 47% 41% 41%Imports 33% 33% 31% 32% 33% 36% 40% 40% 41% 36% 37%Trade Surplus = Net Exports 0% 2% 5% 4% 5% 5% 6% 7% 6% 5% 5%France 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 56% 56% 56% 56% 57% 57% 57% 57% 57% 58% 58%Government Consumption 23% 23% 23% 24% 24% 24% 23% 23% 23% 24% 24%Gross Investment 20% 20% 19% 19% 20% 20% 21% 22% 22% 19% 20%Exports 29% 28% 27% 26% 26% 26% 27% 27% 26% 23% 23%Imports 28% 27% 25% 25% 26% 27% 28% 28% 29% 24% 24%Trade Surplus = Net Exports 1% 1% 2% 1% 0% -1% -1% -2% -2% -1% -1%

Comparison: GDP Expenditure Account

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- 9 -Prof. Dr. Rainer Maurer

EU (26 c.) excl. Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 59% 58% 58% 58% 58% 58% 57% 58% 58% 58%Government Consumption 20% 20% 21% 21% 21% 21% 21% 21% 21% 23% 23%Gross Investment 21% 21% 20% 20% 21% 21% 22% 23% 22% 19% 19%Exports 37% 36% 35% 34% 35% 36% 38% 39% 40% 35% 36%Imports 36% 36% 34% 34% 35% 37% 39% 40% 41% 35% 35%Trade Surplus = Net Exports 0% 0% 1% 0% 0% -1% -1% -1% -1% 0% 0%Germany 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 59% 60% 59% 59% 59% 59% 58% 57% 56% 59% 58%Government Consumption 19% 19% 19% 19% 19% 19% 18% 18% 18% 20% 20%Gross Investment 22% 19% 17% 17% 17% 17% 18% 18% 19% 17% 17%Exports 33% 35% 36% 36% 38% 41% 45% 47% 47% 41% 41%Imports 33% 33% 31% 32% 33% 36% 40% 40% 41% 36% 37%Trade Surplus = Net Exports 0% 2% 5% 4% 5% 5% 6% 7% 6% 5% 5%France 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Household Consumption 56% 56% 56% 56% 57% 57% 57% 57% 57% 58% 58%Government Consumption 23% 23% 23% 24% 24% 24% 23% 23% 23% 24% 24%Gross Investment 20% 20% 19% 19% 20% 20% 21% 22% 22% 19% 20%Exports 29% 28% 27% 26% 26% 26% 27% 27% 26% 23% 23%Imports 28% 27% 25% 25% 26% 27% 28% 28% 29% 24% 24%Trade Surplus = Net Exports 1% 1% 2% 1% 0% -1% -1% -2% -2% -1% -1%

Comparison: GDP Expenditure Account

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Structure of German GDP by Expenditure (in Percent of total GDP; Current Prices)

in % des BIP

17,4%10,0%

Private Consumption (C)

Government Consumption (G)

Exports ./. Imports (X ./. M)

Depreciation

1,8%

- 10 -Prof. Dr. Rainer MaurerSource: SVG, Jg. 2004/5; 1) Including Change of Stocks

➤ A low gross investment share in GDP means low net investments, if capital depreciation is high.➤ As we will see in Chapter 4:

Low net investment means low growth rate of the capital stock.

A low growth rate of the capital stock (≈ the number of machines, which can be used to produce GDP) means low GDP-growth.

➤Is Germany risking its long-run growth performance by exporting to much?

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- 11 -Prof. Dr. Rainer Maurer

Digression: Are Germany's Trade Surpluses Unsustainable for Other Countries?

➤ Why is the German gross investment ratio between 3 % and 4 % lower than the average of countries?■A comparison of the structure of EU, German and French

gross investment provides some useful insights:

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- 12 -Prof. Dr. Rainer Maurer

Digression: Are Germany's Trade Surpluses Unsustainable for Other Countries?

Machinery & Equipment 2000 2001 2002 2003 2004 2005 2006 2007 2008EU (26 c.) excl. Germany 6,4% 6,1% 5,6% 5,2% 5,2% 5,3% 5,3% 5,6% 5,6%Germany 6,4% 6,1% 5,4% 5,0% 4,9% 5,0% 5,2% 5,6% 5,7%France 5,1% 4,9% 4,5% 4,3% 4,2% 4,3% 4,2% 4,4% 4,5%Vehicles 2000 2001 2002 2003 2004 2005 2006 2007 2008EU (26 c.) excl. Germany 2,0% 1,9% 1,9% 1,9% 1,9% 1,9% 2,0% 2,1% 2,1%Germany 2,1% 1,8% 1,7% 1,9% 2,1% 2,2% 2,4% 2,5% 2,4%France 1,6% 1,6% 1,5% 1,5% 1,5% 1,6% 1,6% 1,7% 1,7%Housing Construction 2000 2001 2002 2003 2004 2005 2006 2007 2008EU (26 c.) excl. Germany 5,0% 4,9% 4,9% 5,1% 5,2% 5,4% 5,7% 5,7% 5,5%Germany 6,8% 6,3% 5,8% 5,7% 5,5% 5,2% 5,4% 5,5% 5,5%France 5,4% 5,4% 5,5% 5,6% 5,9% 6,1% 6,6% 6,9% 7,0%Other Construction 2000 2001 2002 2003 2004 2005 2006 2007 2008EU (26 c.) excl. Germany 5,6% 5,7% 5,6% 5,6% 5,6% 5,7% 5,9% 6,1% 6,2%Germany 4,9% 4,7% 4,3% 4,2% 3,9% 3,8% 3,9% 4,1% 4,3%France 5,6% 5,6% 5,5% 5,7% 5,9% 6,1% 6,4% 6,7% 6,8%

Structure of Gross Investment in % of GDP

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- 13 -Prof. Dr. Rainer Maurer

Digression: Are Germany's Trade Surpluses Unsustainable for Other Countries?

➤ The comparison shows:■German investment is lower than the average in Housing

Construction and Other Construction.

■Explanation:

◆Housing Construction is lower because population growth in Germany is lower than in other countries. Cure: Family friendly policy? Managed immigration? ...?

◆Other Construction is lower because traffic infrastructure investment by the government, federal states and municipalities is low. Cure: More government investment? ...?

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- 14 -Prof. Dr. Rainer Maurer

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

46%

47%

48%

49%

50%

51%

52%

53%

54%

Growth Rate of GDP-Productivity (left scale)Growth Rate of Wages (left scale)Share of Compensation of Employees in GDP (right scale)

Wage Restraint and Share of Compensation of Employees in GDPGermany

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

46%

47%

48%

49%

50%

51%

52%

53%

54%

Growth Rate of GDP-Productivity (left scale)Growth Rate of Wages (left scale)Share of Compensation of Employees in GDP (right scale)

Wage Restraint and Share of Compensation of Employees in GDPFrance

Are German wages too low?

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- 15 -Prof. Dr. Rainer Maurer

Digression: Are Germany's Trade Surpluses Unsustainable for Other Countries?

➤ Criticism

6%

7%

7%

8%

8%

9%

9%

10%

10%

11%

11%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Unemployment Rate France Unemployment Rate Germany

Unemployment

Germany

France