Exportweltmeister: The Low Returns on Germany’s Capital Exports *†
4.3 Germany’s capital exports since WW2
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Figure 4.2: German current account balance in % of GDP, 1872 to 2017
-5 0 5 10
% of GDP
1870 1890 1910 1930 1950 1970 1990 2010
Notes: This figure shows Germany’s long history of current account sur-pluses, which is interrupted only by few periods with deficits, in partic-ular after Germany’s reunification in 1990. The past two decades stand out, showing record surpluses both in absolute terms and as a share of GDP. No data is available for 1914–1924 and 1939–1947. Data from the Macro History Database (Jordà et al. 2017) and Bundesbank.
the BIS’s LBS databases both include data on the country composition as well. The FDI data refers to countries anyways. We discuss the approach in Subsection 4.3.2. In this case, too, data is not available for all years for all countries. Table D.5 in Appendix D4 provides details.
Finally, we use data on exchange rates from the Bundesbank for Deutsche Mark (until 1998) and Euro (since 1999). All other required bilateral exchange rates are ap-proximated using BIS data on US Dollar exchange rates.
Figure 4.3: Germany’s international investment position, 1949 to 2017
0 50 100 150 200 250
% of GDP
1950 1960 1970 1980 1990 2000 2010
Foreign assets Foreign liabilities Net position
Notes: The net position is the difference between foreign assets (assets held abroad) and foreign liabilities (domestic assets held by foreigners).
The graph shows the significant buildup of Germany’s gross positions since the 1990s, of both assets and liabilities (financial globalization).
The net position has grown most markedly over the last decade (large and sustained current account surpluses). Assets data from Bundesbank.
GDP from the Macro History Database (Jordà et al. 2017) and the German Statistical Office.
external creditors, both in absolute numbers and relative to GDP.19 Furthermore, Fig-ure 4.3 shows that Germany not only has a large net position but also a large gross position. Both the asset and liability positions rose strongly since the mid-1990s and now amount to 256% and 197% of GDP respectively. While they initially grew in tan-dem leaving the net position at relatively small levels, the gap has been increasing since the mid-2000s and especially in recent years. The net position has been positive over the entire post-war period with few exceptions. It currently stands at 59% of GDP. This reflects Germany’s sustained past current account surpluses.
How does Germany’s international investment position (IIP) compare to accumu-lated capital exports? In a simple framework, one can think of Germany’s external asset portfolio as a savings account. Adding up all the payments that have flowed into this account correspond to the historical book value of gross investments. The difference between historical costs and market value then reflects valuation gains on that portfolio. In other words, the larger the difference between the accumulated flow measure and the current market value of external investments, the higher the capital
19In absolute numbers Germany ranked second in 2017, only exceeded by Japan. In percent of GDP Germany ranked seventh, when excluding the small oil exporting countries. For details see Figure D.1 in Appendix D1.
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Figure 4.4: Germany’s foreign assets and cumulated finan-cial account outflows, 1949 to 2017
0 50 100 150 200 250
% of GDP
1950 1960 1970 1980 1990 2000 2010
Foreign assets
Cumulated financial account outflows Cumulated valuation changes
Notes: This graph shows that Germany’s cumulated financial outflows (gray dashed line) closely track the stock of total foreign assets (blue solid line). This indicates small valuation gains or even losses on the gross asset position. More specifically, the difference between the two series equals cumulated valuation changes, which are negative with the excep-tion of a few years (blue bars). Foreign assets and cumulated financial account flows are adjusted to remove statistical differences between the series, see Subsection 4.2.2 for details. Financial derivatives are excluded.
Data from the Bundesbank.
gains.
Figure 4.4 demonstrates that the value of Germany’s gross foreign asset position very closely tracks the cumulated financial account outflows. This implies that the valuation gains, i.e., the wedge between historical flows and current market value, have been small. The blue bars in Figure 4.4 show that this wedge has often even been negative and is generally small. In light of the multi-decade asset price boom that has characterized the world economy in the past decades, this fact is clearly noteworthy (see Jordà et al. 2019).
4.3.2 Germany’s external portfolio: asset types and geography
The composition of Germany’s foreign assets also changed notably over time. The balance of payments data broadly distinguishes between five different asset categories:
foreign direct investment (FDI), portfolio investment, other investment, reserves, and financial derivatives. For Germany, we have data on the first four categories since 1949, but data on financial derivatives only starts in 2010 since this is an investment type that only became relevant more recently. Therefore, we will show derivatives once here and
Figure 4.5: Composition of Germany’s international investment position, 1949 to 2017
(a)Foreign assets by type
0 50 100 150 200 250
% of GDP
1950 1960 1970 1980 1990 2000 2010
Financal derivatives Reserves Other claims Loans Target2 claims
Currency holdings and deposits (excl. Target2) Equity, portfolio holdings
Debt, portfolio holdings Foreign direct investment
(b)Foreign assets by sector
50 100 150 200 250
% of GDP
1950 1960 1970 1980 1990 2000 2010
Central bank Government Firms+households Banks
Financial firms
Non-financial firms+households
Notes:This graph shows the composition of Germany’s foreign assets over time along two dimensions:
by type of investment (a) and by sector (b). Asset data from the Bundesbank. The data split between firms and households is only available since 2012. GDP data from the Macro History Database (Jordà et al. 2017) and the German Statistical Office.
exclude them from the remainder of the analysis, as discussed in Section 4.2. This will facilitate the interpretation of developments over time.
Panel (a) of Figure 4.5 shows the changing composition regarding asset classes over time. The rise in the overall level in assets was largely driven by increases in foreign direct investment and portfolio investment reflecting increasing international financial integration. Reserve assets on the other hand made up 20-30% of all assets until the 1970s but have become almost irrelevant today. Target2 balances have been increas-ing in recent years but only represent about 10% of all assets. As Target2 balances do not generate income, they could potentially bias our estimated downwards. Through-out the analysis, we will pay close attention that our findings are unaffected by the inclusion of Target2 balances.
In addition to the composition by functional category, one can also decompose the foreign asset position by domestic sectors. Here, the balance of payments distinguishes between four broad sectors: banks, firms and households, the government, and the central bank. In more recent data, the non-bank private sector is further split into fi-nancial firms and non-fifi-nancial firms plus households. Panel (b) of Figure 4.5 shows the changing composition by sector over time. The panel shows that the increase in gross position since the 1990s was mainly driven by banks increasing their exposure relative to GDP. However, since the financial crisis the banking sector reduced its ex-posure. This decline has been partially offset by non-financial firms.
It is equally interesting to consider the geographical distribution of assets. Unfortu-nately, no official data on the country of residence of the counterparties are available.
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Figure 4.6: Geographical distribution of IIP assets, 1985 to 2017
0 50 100 150 200 250
% of GDP
1985 1990 1995 2000 2005 2010 2015
Offshore
Emerging&Developing Advanced Non-Europe
Advanced Europe ex. Euro Area Euro Area
Notes: This graph shows that the majority of German foreign assets are invested in other advanced economies, especially in Europe. The geo-graphical distribution is estimated from additional data sources, see Sub-section 4.2.3. The figure excludes financial derivatives since no data on their geographical distribution available. Choice of offshore countries is based on Bundesbank list of offshore banking centers. GDP from the Macro History Database (Jordà et al. 2017) and the German Statistical Office.
Therefore, we rely on additional data sources to estimate the geographical distribution of foreign investments for Germany and other countries, as discussed at the end of Subsection 4.2.3.
Figure 4.6 shows the resulting decomposition into four regions since 1985.20 The figure reveals that Germany mainly invests in other advanced economies, especially in fellow European countries. The introduction of the Euro in 1999 further increased the European exposure as even more investment went to other euro-area countries. Today, almost 70% of all investments are in other advanced European economies, another 15%
are in non-European advanced economies (mainly the US), and only the remaining 15% are invested in other countries worldwide, including offshore destinations.
20The additional data sources needed do not allow for a meaningful estimation for the period before 1985.
Table 4.2: Returns on German foreign assets, 1950 to 2017
Panel (a): Real returns Panel (b): Nominal returns 1950–17 1999–17 2009–17 1950–17 1999–17 2009–17
Return, all assets 1.59 2.28 2.62 3.95 3.73 3.78
Yield, all assets 1.75 2.00 1.77 4.18 3.45 2.93
Valuation changes, all assets -2.48 -1.12 -0.28 -0.23 0.27 0.85
Return, FDI -0.18 3.78 4.85 2.38 5.27 6.05
Return, equity portfolio hold. 8.25 3.13 8.41 11.00 4.52 9.61 Return, debt portfolio hold. 5.66 3.18 3.40 8.39 4.65 4.57 Return, other inv.+ reserves 1.15 1.21 0.27 3.50 2.65 1.40 Notes: This table shows average real and nominal returns on German foreign assets. Returns are split by components and asset category. Returns estimated using Bundesbank data as discussed in Subsec-tion 4.2.1. Real returns deflated using German consumer price index from Macro history Database and Eurostat.