The aftermath of Germany’s election: how does trade help?
Germany’s election at the end of September was predicted to be dull. Angela Merkel was to be re-elected, possibly on a larger share of the vote, and the country would be able to focus on defining its role at the heart of a re-generated Europe. In the end, the Alternative für Deutschland won 12.6% of the share of the vote – the largest share of parliamentary representation of any extreme right wing party since the World War II. Germany’s parliament is now divided between six parties and the centre right CDU-CSU and the centre left SPD parties have been given a warning by voters that “business as usual” is not enough. Their votes shrank to 36% and just over 20% respectively.
Inevitably there will be a period of domestic uncertainty. The SPD has already stated that it would not be part of a new Grand Coalition. This leaves Angela Merkel the complex task of forming a “Jamaica” coalition of the CDU-CSU, the liberal FDP and the Greens (so called because the colours are those of the Jamaican flag). This will not be an easy process. There are rumours, following the departure of Wolfgang Schäuble from the Finance Ministry that this post is being left open as a negotiating tool for Angela Merkel as she starts discussions with the other two parties.
However, it is possible that trade offers a solution to at least one of Germany’s persistent problems: under-investment in some of the infrastructures in the country that are weak and that may have contributed to the sense of social as well as economic exclusion that the voters in the eastern regions exhibited. In 2016 Germany posted its largest trade surplus ever at some US$300bn – nearly a third higher than China’s at US$200bn (Figure1). Germany’s budget surplus, to which the trade surplus contributes, was €18.6bn in the first half of 2017. Much of this surplus has been achieved through its adherence to stringent, and well-documented, austerity measures. But even in Germany economists and politicians alike are beginning to worry that the surplus is unsustainable: the broadband and road infrastructures in the country are under-invested, for example, and some fiscal stimulus would further boost the European economy.
Figure 1: Germany’s trade with the world, 1996-2016 (US$m)
Source: Equant Analytics, 2017
Germany is to some extent a victim of its own success. The Hartz reforms in the 1990s and aggressive austerity in the wake of reunification provided the country with a more flexible labour market alongside lower government borrowing than any of its European counterparts. But Germany has also been hugely successful in its main economic focus – trade. Its goods are competitive abroad and its supply chains extend throughout Europe and beyond.
Yet this causes political problems in terms of its foreign relations. Throughout his presidency so far Donald Trump has branded Germany and its surplus as “bad, very bad” in his tweets. He has attributed Germany’s success in exporting to the US as a product of the under-valuation of the Euro that has enabled Germany’s manufacturers to price their goods advantageously in overseas market undermining, for example, American manufacturers. The size of Germany’s trade surplus with the US, and the fact that it has widened since the introduction of the euro is a function both of this and of the fact that Germany’s products compete on quality as well (Figure 2).
Figure 2: Germany’s trade with the United States, 1996-2016 (US$m)
Source: Equant Analytics, 2017
But while Germany does export successfully to the biggest countries in the world, among them China and the US, it also operates its supply chains across Europe. In other words, the budget surplus may create distortions, particularly in weaker European countries, but it also helps fuel growth in those very same countries. The automotive sector is the best example: Figure 3 shows the projected annualised growth of German cars and components for its top five import and export partners. It shows how car and component imports from the likes of the Czech Republic and Hungary are predicted to grow to 2020 more quickly than from the US, France or Spain while exports of cars and components from Germany are growing at a slower or similar pace.
Germany’s top five import partners
5.1% Czech Republic
Germany’s top five export partners
Figure 3: Projected annual growth of Germany’s top five import and export partners in the automotive sector, 2016-2020
Source: Equant Analytics, 2017
Germany’s surpluses tell the story of its success in adjusting to two major shocks: its reunification and the global financial crisis. The process has been tough on many Germans, particularly those in the eastern regions and this was reflected in the recent election result. However, Germany is not about to become less domestically stable. It may enter a period of self-reflection, and this is not necessarily a good thing while geopolitical uncertainties are rife. But the AfD and die Linke (the extremist left party) account for just over 21% of the vote between them. Populism in Germany, as with other countries in Europe, has been driven by a sense of economic and social exclusion, largely in the eastern regions of Germany and catalysed by Angela Merkel’s controversial response to the migrant crisis in 2015. To some extent it would be possible to argue that the rise of extremism, because it is so predominantly in the east, is a function of the last nearly 30 years since reunification. Where in other countries populism is a function of exclusion from globalisation, in Germany it is driven by a sense of exclusion from Germany’s second “economic miracle”.
Angela Merkel will realise that this domestic uncertainty is dangerous. Using the surplus to focus on some of the problems of under-investment, including suitable structures to integrate the large numbers of immigrants, will undoubtedly help. It is unlikely that the trade surplus will diminish any time soon – Germany is too competitive for that. But with the trade surplus comes influence, particularly in foreign policy terms. In the run up to the election, Germany’s voters seemed very aware of the responsibility that they had in providing the stability at the heart of Europe in what seem to be turbulent times. The Chancellor’s challenge now is to convert that responsibility into policy.
“The Weaponization of Trade: the Great Unbalancing of Politics and Economics”
Rebecca Harding and Jack Harding.
October 25th 2017 * 170pp paperback *£9.99
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