Germany’s export ideology

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It is well known that Germany is running high export surpluses – more than 200 billion US-Dollar or 7.5% of its GDP in 2017, of which more than 40 billion vis-a-vis the United States. The surpluses are acting as a break on growth throughout Europe and have led to threats by the Trump administration to impose import tariffs on German cars.

Yet it is little known that Germany’s export surpluses are a direct consequence of its own class wars. Since decades, Germany’s industrialists are pushing the line that, in order for Germany to stay internationally competitive, wage growth and social transfer payments have to be curtailed. Because this export ideology has conquered German society and politics, it represents an ideal way for the rich to enlarge their share of the economic cake.

Industry is also calling for restrictive budgetary policies, with a focus on expenditure cuts. The negative impact of restrictive budgets on domestic demand and output is denied, by claiming that budget deficits increase activity only in the very short term, representing a mere “straw fire”.

Since 1991, German real wages and salaries increased by only 0.5% per year – and the figure includes salaries of high earners which have increased much stronger. The Gini coefficient measuring income inequality rose by 7.9% between 2000 and 2013, which is almost the same increase as in the US (7.8%), albeit from a somewhat lower starting point.

The actual or announced curtailment of social benefits, such as pensions, is scaring the average German and leading him to save more as an insurance against an uncertain future. People have not forgotten the 2006 statement by then minister of labour, Franz Müntefering: “Someone who doesn’t work should not eat, either”.

Low wage growth is indeed increasing export competitiveness. But to explain the export surpluses, it must be understood why imports are so weak. This is because the low growth in wages, coupled with high savings and restrictive state budgets, acts as a break on domestic demand.

How did the industrialists succeed to make the export ideology generally accepted? They exploited two traits of the national psyche. The first is a desire to demonstrate to the world that Germany is a high-achiever. All of Germany is proud to be Exportweltmeister – world export champion, just the same way it is proud if it succeeds becoming Fussballweltmeister – world soccer champion. The second trait is the ingrained belief in the virtue of thrift, thus easing acceptance of industrialists’ calls to restrain wages and social benefits.

The export ideology is being propagated via multiple channels: the industrialists’ powerful interest representation, BDI; prestigious large exporters such as Daimler and Volkswagen; the media; and last not least, a majority of economists. In particular, the government’ formally independent council of economic advisors is regularly echoing industrialists’ demands, influenced by a predominance of neoliberal views among the economics profession.

But even in a heavily export-oriented economy like Germany’s, exports account for at most half of economic output. The other half of is directed at the domestic market and suffering from the weak state of domestic demand. As a consequence, domestically-oriented companies are retrenching their investment activity, contrary to the assertions of industrialists and economists alike that the curtailment of wages, social benefits and budget expenditures would lead to an investment boom.

So why does the domestic-oriented half of the economy not rebel against the export ideology?

One reason is that all companies, not only exporters, benefit from the curtailment of labor costs achieved under the banner of increased export competitiveness. Another is the predominance of export interests within BDI. The latter has found a clever way to assuage less export-intensive sectors by throwing its weight behind the demands of small and medium-sized, privately owned firms for tax benefits. In particular, BDI is fiercely protecting the exemption of company ownership titles from inheritance taxes – the main condition for Germany’s rich families to preserve their wealth.

Germany’s governments, in turn, are pressured to support the demands of industry by thinly veiled threats that exporters would otherwise lose confidence and withhold investments or re-direct them to their foreign subsidiaries. The fear of the resulting losses in employment and tax revenues acts powerfully on every government. Such fears have led the former, and so far last, social democratic chancellor, Gerhard Schröder, to implement in 2003-5 the most far-reaching cuts in social benefits in the history of post-war Germany. Voter support for the Social Democratic Party has since declined by half.

The last few years saw a backlash against the export ideology. The 2015 diesel emissions scandal hurt the credibility of the biggest exporters, the car companies. The Social Democratic Party, struggling to survive, made the adoption of a legal minimum wage of 8.50 Euro (7.2 US-Dollar), which was put into force in 2015, a precondition for joining the last government. Finally,  the decline in the unemployment rate to presently 5.7% laid the ground for an average annual growth in real wages by over 3% since 2015.

The resulting increase in domestic demand has stabilized the export surplus at its present, elevated level but is still too small to reduce it, as savings remain high and state budgets in austerity mode. At the same time, some BDI-affiliated economists are already calling for another round of cuts in social benefits.

The battle is far from over.

 

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