Germany’s trade surplus and investments in southern Europe

Francesco Giavazzi

21 April 2010



Some countries in Europe seem to be repeating the mistake the US has been making with the Chinese for almost a decade by telling Germany that failure to expand domestic demand is a sin against the rest of the world. Countries, including Germany and China, pursue their own interests, not the well being of the world. Whether running a large current-account surplus is the right thing to do can only be decided by asking whether such a policy benefits Chinese and German citizens, not the world.

In an article on this site, Charles Wyplosz (2010) makes this point clearly. He argues that at this stage a current-account surplus is indeed the right thing for Germany: “Telling Germany that it must durably reduce its current-account surplus is unwarranted. With a quickly ageing population, Germany would be well-advised to save for a couple of decades as the demographic transition takes place.”

A look at the data shows however, that the European Monetary Union has distorted German foreign investments, putting a significant fraction of the German savings abroad at risk of being wasted. Thus, while a current-account surplus might seem like the right policy for Germany, such distortions of its investments abroad suggest this may not be the case.

Since the start of the monetary union the German total portfolio investment abroad has increased from $800 billion in 2001 to $2,150 billion in 2008 (the data are from the IMF CPIS website built by Gianmaria Milesi-Ferretti and Philip Lane (IMF 2010)). Much of this investment went to the three southern European countries characterised by large current-account deficits (Greece, Spain, and Portugal), with the total increasing from $64 billion to $290 billion – and increase in the share of total German portfolio investment abroad from 8.2% to 13.5%. Capital inflows from Germany have represented an important source of financing for these three countries – about one-quarter of their combined foreign borrowing in these years.

These data suggest that since the start of the monetary union Germany has been an important lender to southern Europe, and that in order to do this it has significantly shifted its investment portfolio towards southern Europe.

Today the wisdom of those investments looks questionable. High Spanish growth over the past decade has been driven by a real estate bubble, not by high productivity, and whatever growth we have seen in Greece was the result of an inflated public sector. These countries don’t look, at least ex-post, like the best places where to invest the savings of German households. Also because the return on the assets issued by these countries have not, until very recently, compensated for the risk the implied.

This is where the Eurozone distortion lies. The single currency has transformed southern Europe from weak-currency countries into strong-currency countries. This has allowed them to issue large amounts of securities in the rest of the Eurozone without paying any significant risk premium.

In Portugal, for instance, foreign borrowing has mainly financed a domestic consumption boom. This happened through Portuguese banks issuing euro liabilities in the Eurozone and using the proceeds to finance consumer loans and mortgages at home. Before the euro this was not possible – or not to the extent we have witnessed – since lending to Portuguese banks would have entailed a significant currency risk.

Germany may wish to keep running current-account surpluses, but if it wants to avoid depleting the savings of its citizens it had better stop investing them in southern Europe – at least on the terms it has lent so far. If changing the terms is not possible, then it would be in Germany’s own interest to raise wages and push domestic consumption.


IMF (2010) “Portfolio Investment: CPIS Data - Database Content
Wyplosz, Charles (2010), “Germany, current accounts and competitiveness”,, 31 March.



Topics:  Europe's nations and regions International trade

Tags:  Germany, Spain, current-account surplus

Professor of Economics, Bocconi University; and Research Fellow, CEPR