“How Germany’s Current-Account Surplus Will Correct Itself”

The Economist magazine just featured Germany on its cover, with the message “Why Germany`s current-account surplus is bad for the world Economy.”

Being on the cover of The Economist is not necessarily a good sign. The magazine has a track record of bad timing, often presenting a topic on the cover as a real problem shortly before a trend change. This happened most recently with the U.S. dollar.

Now that the magazine has joined the chorus of experts and politicians complaining about Germany`s export fetishism, The Economist may be late yet again.

The Economist is often too late

To avoid any misunderstanding, it is in Germany`s own interest to re-balance its economy. It is not a smart strategy to be a creditor in a world awash with debt.

Continuing to build up receivables to countries which will never be able and willing to fulfill their obligations is a very poorly chosen policy goal. In such a world, a big exporting nation like Germany just piles up paper claims.

Just as was the case with The Economist’s (in)famous “Sick Man of the Euro” cover from 1999 before the German economic turnaround, this week’s cover story might well mark the turning point in another direction.

Germany is not so strong

Celebrating Germany as an economic powerhouse is not justified other than in the rear view mirror. Yes, Germany benefits from low interest rates, a weak euro and the ongoing debt-financed consumption and investment boom in some countries.

But, at the same time, Germany’s productivity growth has slowed markedly and the German workforce will shrink in the coming years due to its ageing society. The once famous German education system has also lost its edge and public and private investments are insufficient.

All this would already support the thesis of a weakening Germany in the coming years, even compared with a France which has more favorable demographics and a new government eager to implement necessary reforms.

Germany`s dependence on the car industry

The more fundamental risk to Germany`s economy is the change taking place in the automotive industry globally.

Germans correctly believe that they are producing the best cars in the world, but they are mistaken to think that this will be the case in the future as well. The industry incumbents, like the country, are underestimating how fundamental the change will be.

The German car companies are not the first ones to underestimate how fast and how drastic change can take place. The producers of horse-drawn carriages did not expect the automobile to be a challenge. And indeed, it looked in the beginning to be just a niche market.

Professor Tony Seba from Stanford University brilliantly illustrated the hubris of such thinking when he showed two pictures of New York’s Fifth Avenue, one from 1900 and the other from 1913.

The first picture showed the road filled with horse carriages and just one car, the second showed the street filled with cars and only one horse.

The future is electric

According to analysts from the investment bank UBS, already next year the cost of ownership of electric cars will match those of traditional gas or diesel cars.

In the future, the traditional combustion engine will see a cost disadvantage due to ever-rising costs to limit pollution. Meanwhile, the electric car and its components will enjoy the benefits of economies of scale and scope. As soon as 2025, UBS expects to see a global market share of 14% for electric cars, mainly in the industrialized nations.

Professor Seba is making even more far-reaching predictions. In a new study, he concludes that in 2025 no car or truck with a combustion engine will be sold worldwide.

Whether or not that date will bear out, all will eventually go full electric. Although this might be a provocative statement, designed to attract public attention, it is based on economic principles.

It is much cheaper to produce an electric car. The maintenance costs are much lower (a Tesla has 18 moving parts while a traditional car easily has 100 times as many). The usage of cars is also changing, notably in cities, moving from ownership to car-sharing models.

Bye-bye Germany’s advantage

As a result, the competitive advantage of the German automotive industry will be gone. And with it, the German current account surplus, which is now in the focus of much global criticism, will shrink considerably.

The technological advantage of German car producers is irrelevant in the new world. High-tech combustion engines will not be needed anymore. Fast gearboxes will be seen as an artifact from times long passed.

Even the simplest electric car will accelerate on a level only seen by today’s super sports cars. And with the self-driving car, the next challenge for the German players is already in sight.

The German car industry needs to fight on many fronts. It needs to defend its existing investments by prolonging the life of the combustion engine as long as possible. This will require significant investments.

At the same time, Germany needs to develop its own range of electric vehicles. The country is painfully dependent on suppliers of batteries, rather than developing its own technologies.

Of course, there are examples of companies that have successfully managed such a fundamental transition, like the horse-drawn carriage producer Studebaker, which transformed into an automotive player. However, the probability is low.

Threat for the whole economy

Given these changes, it might well be that the German trade surplus will soon be a topic of the past.

The Economist might write a nice story then about the fall of a country, which was overly dependent on one industry, lacking the will for drastic change.

The German government seems to understand the risks. Mrs. Merkel has stated in discussions on the European level that she “doubts the survival of the German car industry.”

In other countries, this would lead to a political initiative to support the necessary change. Not so in Germany. Mrs. Merkel only speaks about a supporting role in managing the fallout of this change.

As with the crisis of the euro and uncontrolled migration, Merkel prefers to kick the can–or the car industry’s future–down the road. The end of the German current account surplus is nigh.

→ the Globalist: “How Germany’s Current-Account Surplus Will Correct Itself”, 17. Juli 2017