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The Politics of Germany’s External Surplus

The global debate about macroeconomic imbalances has become a misdirected critique of Germany’s spending habits and approach to trade. While political calculations may prompt Germany to think differently about its current-account surplus, there is no compelling economic reason to alter the status quo.

MUNICH – The debate about global macroeconomic imbalances is increasingly focusing on Germany’s current-account surplus and economic policy. Despite the vitality of the German economic engine, and the role it plays in fueling growth and maintaining stability in the eurozone, criticism of the country’s massive external surplus is mounting. As the Economist put it recently, Germany “saves too much and spends too little,” making it “an awkward defender of free trade.”

So what is Germany to do? The answer depends on whether economics, or politics, is guiding the decision-making.

The current criticism, which provided what one observer called an “uneasy ambiance” at this month’s G20 summit in Hamburg, focuses on two claims. First, Germany is hurting itself by exporting too much and investing too little at home. Second, Germany withholds demand from the rest of the world, in particular the US. If Germany contributed more to global spending, according to this view, the economic recovery from the 2008 financial crisis would have been stronger.