Currency and Financial Markets Economic Policy Monetary Policy ZEIT ONLINE op-ed column

Germany’s savings madness

This text was also published in German in  ZEIT ONLINE on February 17,  as part of the op-ed column “Fratzschers Verteilungsfragen“.

Germany is generating substantial export surpluses – but the profits are being squandered abroad. The solution? Investing in Germany.

Since the year 2000, every German has lost an average of €7,500 euros in savings abroad.

How could that be? Didn’t our country just post a record surplus, exporting significantly more to its foreign partners than it is importing? Yes, German companies and thus German citizens have produced and exported €2,200 billion more in goods and services than consumed: a positive trade balance.

But what happened to the tremendous amount of money that was flowing into the German economy due to its trade surplus? It was invested by German companies – especially banks and other financial institutions – in foreign countries. These investments have led to high losses over the past few decades. Since the year 2000, a net sum of 2,200 billion euros was invested abroad; but these assets currently only amount to €1,600 billion, or an average of €20,000 per capita. The total amount lost: €600 billion, or €7,500 per person.

Taxpayers bailing out careless banks

What was the cause of this? It’s primarily due to the investment behavior of German financial institutions who have invested tremendous amounts of money abroad, but did so very badly. But it’s not just about the lost money: these poor investment choices also affect German taxpayers, who are still bailing out many of the affected institutions. Almost no other European country saw its banks incur greater losses during the global financial crisis, or forced its taxpayers to step in and take on such massive sums, as did Germany.

But it didn’t begin with the global financial crisis, either: German companies and financial institutions have been botching many of their foreign investments for years. In the 1990s, for example, several German businesses purchased U.S. tech companies at heavily inflated prices, only to lose a substantial share of these investments when the dot-com bubble burst.

These major losses are all the more astonishing in light of the fact that interest rates on Germany’s own obligations to foreign investors are quite low. These investors hold a high proportion of safe German government bonds that are currently offering mostly negative interest rates. Although the catastrophic foreign investment failure of Germany’s financial institutions and companies could be due to lack of competence, the sheer size of the investment abroad may also play a role.

Isn’t it good to build up savings? It is, but only if one actually grows the savings instead of squandering it through a series of bad decisions. Germany has been doing the latter – and now the country is jeopardizing its future prosperity through its foolhardy misuse of our savings.

That saving is intrinsically good and debt is bad appears to be deeply rooted in the German psyche: it’s not a coincidence that the German word for “debt,” Schulden, is derived from the word for “guilt,” Schuld. But there’s nothing inherently good or bad, right or wrong, about saving or debt. Saving entails renouncing prosperity in the present in hope of preserving it or even increasing it in future; and debt isn’t necessarily bad if it is later invested intelligently and transformed into a more prosperous future.

No savings for the bottom 40%

The fact that Germany’s savings have been squandered abroad is bad enough. But there is one characteristic that makes it even more problematic: Germany’s savings are more unevenly distributed than those of almost any other Western country. The bottom 40% of German households in terms of wealth have virtually no net savings – that is, nothing they can use for their children’s’ educations or for their own care in old age. Meanwhile, the upper 10% hold over 60% of Germany’s total net assets.

So what should Germany do with its money instead of saving it or investing it abroad? Inarguably better than investing and squandering it abroad would be reinvesting part of it here in Germany. If this money is put into education, innovation, and good infrastructure, it would directly benefit the current population as well as future generations. An increase in such investment would improve productivity, create more good jobs, enable higher income levels, and secure the long-term attractiveness of Germany as a business location – all of which will lead to an increase in prosperity.

We Germans need to wise up when it comes to dealing with our wealth and savings. Our trade surpluses are bad, not because we’re exporting too much, but because we’re not investing enough in our own country and our foreign investments have been handled poorly. Only by reducing our trade surpluses and investing more in Germany can we both safeguard our economy for the future.

 

One comment

  1. 1) Who “forces” German firms to invest their surpluses abroad? They could invest it in Germany or in boring low-yield assets. Then it’s not a problem of a huge current account surplus but simply one of bad investment decisions.
    2) If you apply the thinking that only countries with a positive current account can invest abroad, why did countries without a current account surplus (France, Italy…) also invest heavily in the U.S. mortgage market or in Greece? (My answer would be that banks can create loans, they don’t require the Germans to carry their savings to the banks)
    3) If German firms wasted all of their hard earned profits abroad, shouldn’t we have seen a wave of insolvencies as a result of bad investment decisions? Yes, the banks made losses (as in other countries, see above), but since it was the money of the exporting firms, there should at least be some concerns. Yet, most German firms are doing fine (again: could it be that banks (or a country in general) do not require savings to invest because of money creation?)

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