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Why Germany’s 'Bad' Exports Are Actually A Blessing

Just because trade balances tend to work in Germany's favor doesn't mean partner countries aren't benefiting too.

Container ship at Hamburg port
Container ship at Hamburg port
Dorothea Siems

BERLIN — Germany draws plenty of outside criticism for its strong export sector. And it isn't just Donald Trump saying the high current account surpluses in bilateral economic relations are unfair. There are also complaints within the EU about the huge trade imbalances between Germany and other members.

Germany's success, critics argue, comes at the expense of other countries — especially its EU partners — and is responsible, among other things, for the poor economic development in countries such as Greece or Italy. And yet, not everyone subscribes to this zero-sum game thesis, which holds that one country's success in exports automatically means a disadvantage for its trading partners.

A study by the Swiss economic research institute Prognos, for example, suggest that, because of the far-advanced division of labor inside the EU, other member states are in fact profiting greatly from Germany's economic recovery. As a whole, German import demand ensures close to 5 million jobs in all other member states, according to the study, which was commissioned by the Bavarian Industry Association (VBW) and published by Die Welt.

The German market for intermediate goods and capital goods alone is responsible for a total of 3.4 million jobs all around the EU. And if Germany forfeits its competitive strength — through high wage increases, for example — this would in no way benefit most European countries, but would instead have negative consequences, according to the Prognos researchers.

German import demand ensures close to 5 million jobs in all other member states.

In the first 11 months of 2017, Germany exported 750 billion euros' worth of goods to other EU countries. Thus, nearly 59% of all German exports were sold inside the European single market. In the meantime, it brought in 590 billion euros' worth of goods — i.e. 57% of its overall imports — from the EU.

For many European countries, Germany is the leading trading partner. And they've benefited from it. Such is the case with Poland and the Czech Republic. On the other hand, low-growth countries in Southern Europe have profited significantly less from Germany's success. Places like Portugal and Greece, for example, have relatively weak industrial bases. They don't produce very much, in other words, and so have relatively little to export to Germany.

Germany's biggest trade providers in the EU are the Netherlands, France and Belgium. Fourth on the list is Italy, followed by Poland, the Czech Republic and Austria. For many EU countries, Germany is by far the most important sales market. Austria, Hungary and Poland send more than a quarter of their exports to Germany. For the Czech Republic, exports to Germany represent about a third of all of exports.

Since reunification, the Prognos researchers note, the German industry's internationalization strategy has focused heavily on increasing the division of labor with countries in Central and Eastern Europe. Numerous German companies, as a result, have extended their production chain to that region.

This industrial division of labor is also reflected in how Germany imports from the EU. After all, 70% of imports consist of industrial primary products and capital goods. By contrast, consumer products such as food, clothing or automobiles play a much smaller role, representing only 30%. The German automobile industry is characteristic of this dynamic. The leading buyer of materials from other EU states, the automobile industry alone imported 100 billion euros' worth of goods in 2016, according to Prognos. Second on the list is the chemical industry, followed by the mechanical engineering industry. The food industry, which mainly imports consumer goods, comes fourth.

Germany is Europe's growth locomotive.

Of all EU countries, the Czech Republic benefits most from trade with Germany: A good 8% of its total economic output is fueled by German demand for imports; in Slovakia, the Netherlands and Austria, the number is around 7%. In places like France and Italy, on the other hand, the figures are much lower, as exports to Germany represent just 1.7% of total GDP.

Prognos expects the German economy to grow, on average, by just 1.6% in the coming years. That, in turn, could have significantly negative consequences for many EU partners, particularly Slovakia, the Czech Republic, Hungary and Poland, the researchers warn. Greece and Italy, on the other hand, could actually benefit a bit from it, given that a weakening of the EU's largest economy would lead to lower interest rates, while France and Spain are unlikely to be affected either way.

"Germany is Europe's growth locomotive," says VBW head Bertram Bossardt. "A deterioration in the competitiveness of the German economy would weaken its EU partners and cause job losses."

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