Germany: Deferred Consumption Lost?

June 13th, 2012
in Op Ed

by Dirk Ehnts

piggy-bank-colorfulSMALLFrom 1952 until today Germany has had a positive trade balance, meaning that exports are above imports (source: destatis). Not even the re-unification could stop this. How can we celebrate this? Let's have a look at the International Economics textbook of choice, which is Krugman/Obstfeld/Melitz. I must admit that I don't have the new edition, but I think I know what they changed because I used some of the slides for my course.

Follow up:

Net exports can arise from inter-temporal issues. If Germans prefer to consume later, and others prefer to consume today, than trade imbalances arise. It is somewhere in the textbook, it used to be in chapter 7 as part of international factor movements. Under the heading "International Borrowing and Lending" an intertemporal production possibility frontier is shown. The real interest rate will bring the intertemporal market into equilibrium so that both countries are better off. Now this is really silly. It must mean that Germans had been postponing consumption into the future for the last 60 years. The real interest rate has been moving up and down, but Germans always shifted consumption into the future. Even though today the real interest rate in Germany is negative, those stubborn Germans prefer to consume in the future. Is this theory believable? Of course not.

As a student of development economics, I know that countries that (re)industrialize try to push their exchange rate and/or nominal wages down in order to lure FDI (=technology) into the country in order to upgrade their production facilities. That strategy, now followed by Germany, Japan and China and many others, can be discussed through balance of payments constraints and the like. However, my text book (8th International edition) says on page 96:

Our analysis leads to the following general principle: Export-biased growth tends to worsen a growing country's terms of trade, to the benefit of the rest of the world; import-biased growth tends to improve a growing country's terms of trade at the rest of the world's expense.

Why then did Germany's terms of trade not decline over the last 30 years (source)? Why is Greece suffering today and Germany still doing relatively well? To the credit of the text book's authors, there is a chapter on developing countries and their problems. However, it was presented as something that could only happen to "them". Also, Japan's macroeconomic crisis is not discussed in a meaningful way.  I think that Krugman/Obstfeld/Melitz is not a bad text book, but from my point of view they focus on the wrong issues. Every time a neo-classical model gives us a flow equilibrium, it is featured prominently in the book with conclusions like the one above: very precise, but then, very wrong. Discussing stocks - like levels of debt of private sector, banks and households or the government - is relegated to the second row since no nice mathematical models exist that can deal with the stock-flow problems.

It is not surprising that we have the crisis that we have.  Looking for the keys only inside the light cone of the street lamp meant that some very important issue were ignored. Therefore, we do not know whether we can celebrate 60 years of positive trade balances in Germany.  Perhaps the future consumption that Germans should enjoy as a result of their thriftiness in the past will be destroyed by the economic mismanagement of the recent past.

More articles by Dirk Ehnts

Related Article

Germany: Export and Import Numbers Declined in April 2012 (GEI News, 13 June 2012)

About the Author

Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101Curriculum Vitae.

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