German investments abroad - a bad deal?

In 2013 the German economy generated the world's highest current account surplus, overshooting the EUR 200bn mark with further rises likely in the future. The trend provides plenty of new ammunition to critics of Germany's current account surplus, which has been a hot topic of debate for years now. In the one camp, there are those who see the current account surplus as testimony to Germany's economic strength and solid competitive standing. In the other, we have those who believe that it is an upshot of weak domestic demand. There is a mounting chorus of critical voices abroad claiming that, with its wage dumping tactics, Germany is putting foreign competitors at a disadvantage while at the same time exporting deflation and unemployment.

In Germany itself, critics are focusing on the fact that Germany's export surpluses are financed by lending to foreign countries, raising the question as to what the real value of our receivables actually is. Are we not getting fair value for our exports? Recent research on the matter suggests that Germany has suffered value losses on its net foreign assets corresponding to more than twenty percent of its economic output since 2006, fueled by the financial crisis.  If the analysis is indeed correct, dramatic losses on this scale raise a whole number of questions. Do the Germans have a certain penchant for speculative or purely tax-motivated investments ("dumb German money"), frittering away hard-earned current account surpluses in the process? Is it a bad idea after all for a country like Germany, subject to unfavorable demographic trends, to invest a chunk of its savings abroad on diversification grounds and given the more attractive return opportunities? Should German investors keep their money at home instead? The answer to all of these questions is "no", as a closer analysis shows.

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