Is Germany an economic miracle or a deflationary force?

There has been a raft of economic data out of the Federal Republic of Germany this morning but before we get to that there are two major themes I wish to point out. These come from its membership of the Euro which has given its exporting industry in particular an enormous competitive boost. To get an idea of the scale of these we merely need to consider where the Deutschmark would be trading now if it existed. The musical theme is “higher and higher it’s a living thing” by ELO. If we look at the most similar currency which is the Swiss Franc we see that a new Deutschmark would have soared like a bird and created all sorts of problems for the German Bundesbank in trying to cope with it and German industry. If the Swiss pattern was repeated then the Bundesbank would also be an enormous hedge fund with a central bank on the side. As for the exchange rate well it would be more like 1.50 to the US Dollar ( and perhaps higher) rather than the 1.05 that Euro membership has brought,

In addition Germany has seen low and more recently negative interest-rates with the deposit rate of the European Central Bank currently -0.4%. If there is anywhere that sees this translated into lower borrowing rates for businesses and consumers in the Euro area then Germany will be at the top of the list. Whilst I doubt that negative interest-rates themselves help much Germany has seen low interest-rates for quite some time now. In an example of the sort of “Not Fair” sung about by Lilly Allen we also see that the German government has benefited from some 304 billion Euros ( and rising) of its debt being bought by the ECB. It is seldom asked how wise or indeed necessary this is/was but for now let me simply point out that the ability to issue debt at low and negative yields has added further to Germany’s ability to run a budget surplus.

The trade problem

This is usually presented as an economic triumph for Germany and in many ways it is but with it problems have been created and we see these in this mornings data release.

Germany exported goods to the value of 108.5 billion euros and imported goods to the value of 85.8 billion euros in November 2016. These are the highest monthly figures ever calculated both for exports and for imports. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 5.6% and imports by 4.5% in November 2016 year on year.

So not only a large trade surplus in goods but one which is growing so much it is a record. If we widen our outlook to services then the position changes but by a relatively small amount.

services (-1.8 billion euros)

If we look at the Euro area we see that Germany continues to be a deflationary influence on the other nations.

In November 2016, Germany exported goods to the value of 63.2 billion euros to the Member States of the European Union (EU), while it imported goods to the value of 56.9 billion euros from those countries.

This is not explicitly due to the exchange rate of course but makes us wonder what other gain have been provided by a lower exchange-rate such as possible economies of scale for its vehicle producers. If we move to outside the Euro area than the numbers speak for themselves.

Exports of goods to countries outside the European Union (third countries) amounted to 45.2 billion euros in November 2016, while imports from those countries totalled 28.9 billion euros. Compared with November 2015, exports to third countries increased by 7.6% and imports from those countries by 3.9%.

So we see not only a large and growing surplus but one that seems to be accelerating and here of course the value of Euro membership can be explicitly seen.

When the credit crunch hit there was a lot of talk about the German trade surplus being a factor ( along with the Chinese and Japanese ones) yet we see that as we sadly see so often if anything it has grown. The initial impact is to raise German GDP via net exports but the way that it happens year after year means that demand is sucked out of other countries. If you throw in the budget surplus I mentioned earlier then you have plenty of fuel for my argument that the theme that Germany keeps losing with regards to matters such as ECB policy needs the counterweight that in areas which it considers most important Germany continues to get what it wants.


This morning has seen another consequence of this.

In November 2016, production in industry was up by 0.4% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)

This follows a 0.5% monthly increase in October but to see the overall picture we need to look deeper. If we look at the manufacturing output index then it was 100.2 in November 2008 and was 110.5 in November of last year. So we see growth over what has been a very difficult period for western manufacturing. Now those two months make it look better than I think it is but in general 2016 is better than 2008 whereas if we look at my country the UK we see a different situation.

In Quarter 3 2016, production and manufacturing output remained below their Quarter 1 2008 levels by 8.0% and 5.7%, respectively.

There has been good news this morning from both Rolls Royce and Jaguar Land Rover with their 2016 figures but it is plain that the UK has quite a bit of ground to catch up.

The outlook

The future is bright if the Markit business surveys are any guide. According to them Germany had a solid last quarter in 2016 and 2017 looks okay as well.

With services expectations also improving in December, the outlook for 2017 is bright – IHS Markit is forecasting solid GDP growth of 1.9% for the year as a whole.


If you are looking for support for the theme of Germany being something of an economic miracle then one would look at the trade position combined with this which was reported by Eurostat earlier.

the lowest unemployment rates in November 2016 were recorded in the Czech Republic (3.7%) and Germany (4.1%).

As we move to youth unemployment we see a further example but also a hint that perhaps a deflationary consequence has been seen elsewhere.

In November 2016, the lowest rate was observed in Germany (6.7%), while the highest were recorded in Greece (46.1% in September 2016), Spain (44.4%) and Italy (39.4%).

If we look back at the history of the Euro we see that it has benefited Germany hugely and that monetary policy has in general been set for it. There are doubts rising from the latest phase of negative interest-rates and 1.5 trillion Euros of QE ( Quantitative Easing) which have seen consumer inflation rise to 1.7% in some German regions with the likelihood it will push higher as 2017 progresses. Or as Die Welt puts it.


Actually in a link to my next part they are discussing Mesut Ozil who of course is trying to get a large pay rise from Arsenal football club which has to be inflationary. But many think that an increase in wages in Germany would improve things as highlighted by this below.

2017 price-wage loop check: wage bargaining rounds kick off in Germany with unions asking for 6% pay rise for 800k regional public servants. ( h/t @MxSba )

Of course in both cases asking is one thing and getting is another. But it has long been argued that higher wages in Germany would set off a beneficial cycle as follows. Workers would be able to consume more ( the original Ford motor car strategy as discussed in the comments a few days ago) thereby boosting imports and shrinking the trade gap as well thereby benefiting both the German and overseas economies. As Germany is estimated to be 5.5% of world economic output this could have a solid effect in world terms.

As ever life is unlikely to be that simple as for example what if the higher wages set of an inflationary push? Or make companies uncompetitive? But in general I think it is hard to argue that a nudge higher would be what economists call a Pareto gain.


38 thoughts on “Is Germany an economic miracle or a deflationary force?

  1. Compare Germany to Greece, who has benefited from being a member of the Euro the most? If the EU is a group of equals and wanting to have more integration, then I suggest Germany pays off Greece’s debt. Simple!

    • Hi Foxy

      That is a question that has an obvious answer. The Greek were sold out by their establishment weren’t they? The Germans have marched on in economic terms. Thinking of debt the “Eurobond” debate seems to have ended for now anyway which is another success for Germany.

  2. Germany really is the epitome of a vampire squid sucking the life out of the Eurozone. Had the Euro area moved to full political and economic integration then this situation would be ameliorated by the transfer of wealth from north to south Europe by financial support for poorer countries established in a Eurozone budget. Unfortunately the Euro is a ‘half pregnant’ project that will probably never proceed to full economic union ( Germany would never agree to wealth transfer ) and so this horribly unfair situation will prevail. Membership of the Euro prevents normal market forces from working and so Germany enjoys all the benefits of an artificially weak currency without any of the responsibility that should go with it. Having said all that I do not wish to detract from the fact that Germany makes good quality products that the world wants however they do so on a very uneven playing field. No wonder the Germans are so pro Euro and the EU!

    • Hi Pavlaki

      Yes it is logical for the Germans to be the most ardent EU and Euro supporters. They have been able to pick and choose the requirements and circumstances to suit themselves. Even more than that the PR machine has been spinning hard because we keep seeing media reports that they have lost the debate or the ECB.

  3. Hi Shaun, I’ve been waiting for a suitable topic to float my Eurozone solution. So here it is; Re-introduce national currencies alongside the Euro with the shared currency still the price tag for goods and services across Europe. The national currency is the denomination of national liabilities and only exists as electronic money. Govts love electronic money because its traceable and has low transaction costs. In Germany’s case, all state wages, municipal or local authority wages and pensions would be paid only in the new Edeutchmark. Govt bonds and debts would also be redenominated in the local eCurrency.

    Would this work? What exchange rate between Euro and local, well it could be maintained or float ala Suisse.

    It would allow the Euro project to continue and acknowledge that the national banking infrastructures have never and will never coalecse.

    For Greece the state could achieve the devaluation for EDrachma which is needed to trash the State liabilities. For Germany, selling cars in Euros, I think the price would go up which is what is needed.

    Your feedback welcomed.

      • Yes Foxy, certainly it would be an admission of failure to converge and they don’t like to admit the project has failed so you are most likely right.

    • The economist Edward Hugh (sadly now deceased) proposed some years ago the idea of a Euro 1 and Euro 2 with Germany and the like in the Euro 1 zone and southern european countries in Euro 2. Exchange rate between Euro 1 and 2 would be set by the ECB and countries could graduate from one to the other when their economies warranted it. It would provide an overnight devaluation for Greece, Italy etc and would make Euro 1 an even stronger currency. It was a well thought out proposal with more detail than I have outlined and may still be available somewhere on the internet.

      • Thanks Pavlaki, they had accession criteria and fudged those numbers so it is pretty much the same approach. This solution would include a loss of face about the Euro outcome so probably dead in water.

    • I’ve also wondered about such a solution. It would be like a central pool with all the other currencies floating in and out of it. Local currencies have been tried in several towns in the UK. I’ve no idea whether they work or not long-term but is a similar idea.

      • Jan, I live in Bristol and our “pound” has had fits and starts. I’d say the confusion with exchanging labour for credits and fiar value has always dogged localism currencies.

    • I don’t think this would work in practice as the job of comparing local currencies to the Euro is no different to simply comparing them to each other but adds more complication via your requirement for state salaries/pensions etc to always be paid in local currency electronic money.

      In such a plan the Euro project could not continue as where would it go? Or maybe that’s your tongue in cheek point?

      Personally I favour scrapping the Euro with countries re- adopting their currencies but continue with the single market theme. This would be good for Greece et al but bad for Germany and Holland et al. However, the strong are always more capable of coping with stress than are the weak.

  4. Redinomination – creditors (including Germany) take a hit – No!

    It undercuts the Euro and degrades the “ever closer union” objective and brings back the nation state by the back door. – No!

    It misunderstands one fundamental point about the EU: that solving problems is not the issue or the objective; the issue is maintaining the faith at whatever cost.

    • Yes I agree. You see Status Quo everywhere, infact we’ve had Status Quo for 20 years. One even died recently even. Now there is Brexit and Trump, like buses always come together. what is the next stop?

  5. well as the Irishman said on being asked directions to Dublin…..

    ” If yer wanting a Euro union , I wouldn’t be starting from here….. ”

    How much more gold does Germany need to pile up before the other states realize they’ve been had ?

    can’t we just restart this Euro project from the beginning? , seems too broke to fix it now….


    • Hi Forbin

      What was that about a camel being a horse designed by a committee. The Euro is a half finished project which its proponents hope can be finished off. Except it requires fiscal and political union which seems further away rather than nearer to me.

  6. Amazing, isn’t it? Always Germany’s fault for being productive and efficient, producing things other people want to buy (and the currency issue is largely a red-herring when it comes to buying most German goods). Why can’t they just be idle and feckless, like the Greeks and Spanish. Alternatively, why not print money and think asset price bubbles are a sign of economic strength, while also failing to value and reward skills and education, like the British. Then they should follow these powerful economies with high levels of government and personal debt before demanding devaluation, which has of course made the UK so rich since 1968. With such great examples, why shouldn’t Germany emulate them?

    Of course, it is always easier to blame others. It’s what 17m people did last year.

    • “..Why can’t they just be idle and feckless, like the Greeks and Spanish…”

      Gross generalization

      As for the British and German comparison – I have often posted about the “stunning” management the British have…..

      “Of course, it is always easier to blame others. It’s what 17m people did last year.”

      please let us not get into any flame war again……


        • It’s not the whole truth though, is it?
          If the Greeks and the Spanish weren’t as “feckless” as you put it (ffs, the Greeks work more hours than the Germans), there’d be about £2 to €1.
          How many cars would the Germans sell then?
          The FACTS are:
          1) German prosperity DEPENDS on Greek/Spanish fecklessness.
          2) The EU reinforces the situation.

          Wtf do you think so much money was lent to the famously, financially irresponsible/corrupt Govts. of S. Europe, if it wasn’t for debt enslavement?

    • No one is denying that the Germans make excellent products however I have to disagree that the currency is not an issue. If German goods cost say 50% more they wouldnt sell the volumes that they do now. I also take issue with the description of Greeks as idle and feckless. Their government leaves a lot to be desired however I personally know a number of Greeks who hold down two jobs and work very long hours just to make ends meet.

        • Workers become powerless in terms of productivity.
          Lack of investment leads to restrictive practices, which is the only way workers can protect their livelihoods.
          So, again, nothing to do with fecklessness, which is the neo-liberal lie spun to blame the poor for their plight.

    • hello David ,

      be positive about that old vote last year because the die is cast and who knows what you’ll gte , snake eyes ? or

      after all …………


    • Mr Hollins
      I very rarely if ever post on this site merely to criticize other comments but in your case I make an exception.
      Let us postulate that every country adopted the mercantile behaviour of Germany. Every country has a positive trade balance. See any problem with that?
      There is nothing ‘virtuous’ about a positive trade balance, nor the inverse. As others have stated Germany has deliberately used the Euro as a means to an end. If I was to be a little controversial I could argue that it has resulted in pretty much the same position that was envisaged 7 or 8 decades ago.
      The average German does not particularly benefit from being a citizen of this ‘miracle’. Indeed recent events , designed principally to ensure a continuing downward pressure on the labour force, leave the ‘miracle’ tasting quite sour.
      I hope this ‘truth’ hurts.

      • Not sure Germany has “deliberately used the Euro as a means to an end”. Its simply got on with trying to make high quality things as cost effectively as possible and the weakish Euro (from Germany’s perspective) has been an unforeseen benefit due to poor productivity and debt management in other EZ countries.

        Germany should acknowledge it’s windfall from this development and stop whining about debt write offs of the poor EZ countries etc.

      • You are just trotting out the same old nonsense from the feckless, idle and low-skilled. Germany runs a trade surplus, because other people want to buy its output – Even Nigel Farage has grasped that if your currency is strong, you simply have to become more efficient – those countries like the UK, who don’t, then have to rely on a constant demand for devaluation and we can see the results in the changes in living standards since 1968. If we produced high-quality products (and finance is one of them), people will buy our products rather than Germany’s – yet it is Germany’s fault that people prefer theirs.

        Of course, you resort to abuse over WW2 and claims of Nazi plans – that really is the last line for Brexiteers, who want to blame anyone else, but themselves.

        The recent immigration is down to Germany’s falling birthrate – Frau Merkel’s mistake was perhaps not to invite people from here, who were sick to death of the small-minded whinging and wanted to produce top-class products … which others might want to buy.

      • Hallo JW, don’t know if you’ll read this but I’ll post anyway. I finally got around to reading the research paper and feel that the truth of your supposed German malevolent mercantilist approach is actually undermined by a sentence at the top of page 14 – “It is capitalism that is malevolent, not
        a single country.”

        Face it, every other country wants to be just like Germany.

  7. Shaun,
    ECB support is even greater when considering its corporate bond purchases as part of the QE exercise – no doubt German companies are at the head of the target list!

    • Hi Chris

      One might think so out of the 51. 8 billion Euros worth so far except we are missing one crucial detail from the breakdown. From the ECB

      “Purchasing NCBs will publish a list of the individual bonds they hold on a weekly basis without revealing the size of their holdings in each bond. ”

      That is of course useful in some ways but useless in others!

  8. I’d praise the German govt because they deliver a much better standard of living to their citizens than the UK manages. They achieve this with rent capping rules, unlike the UK whose housing is a giant monopoly game benefitting the landed gentry. They collect taxes and pay for decent hospitals, schooling that gives employable skills and decent infrastructure. They support a good welfare system. Even the much maligned German industrialist elite pay tax, unlike the US’s soon to be tax-dodger in chief.

    If you want publicly funded health, education and welfare the elite must pay tax. The Greek elite don’t. Many Greek workers work long hours for little money -> and this is related to corruption, kleptocracy and oligarchy.

    Therefore I think this ‘blame Germany’ propaganda is an exercise conducted by mega-rich kleptocrats. Greece’s big problem is that the 1% don’t pay their fair share of tax.

    • Hi ExpatInBG

      There are plainly strengths in the German system as you point out. However we can see from the way that the EU and Euro have developed that you can have too much of what are otherwise good things. The convergence simply failed to happen in the real economy and only did so in the financial one as bond yields for example converged.

      • If I may add, If Germany just did all that is described above whilst containing any negative effects from flowing across its borders , then fine. But it deliberately took the opposite course.

  9. Hi Shaun, quickly skimming this as I’ve been on an emergency callou so apologies if someone else asked – “As for the exchange rate well it would be more like 1.50 to the US Dollar ( and perhaps higher) rather than the 1.05 that Euro membership has brought,”

    What? Do you mean $1.50 to a deutschmark?

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