Why Germany’s trade surplus is bad for the eurozone by John Springford and Simon Tilford
In late October, the US singled out Germany as a threat to the global economy. The Treasury issued a report saying that Germany’s current account surplus – now around 7 per cent of GDP – imposes “a deflationary bias for the eurozone as well as for the world economy.” Two weeks later, the European Commission promised to review Germany’s surplus under its ‘excessive imbalance procedure’. Many German politicians and business people quickly dismissed these interventions, claiming that the surplus is mostly with the rest of the world, not the eurozone, and so does not affect the periphery; that the surplus reflects the country’s competitiveness; and that deflation in the eurozone periphery is positive as it indicates that these economies (and hence the currency union as a whole) are becoming more competitive. They are wrong on all three counts. There is no doubting the competitiveness of Germany’s manufacturing sector, but the main reason the country’s external surplus has risen further (despite sluggish demand for German exports from a depressed Europe) is the weakness of domestic demand in Germany: this rose by just 0.8 per cent over the last year, despite very low unemployment. The result is that Germany is doing little to provide any offsetting stimulus to austerity and demand-depressing structural reforms in the eurozone periphery, making the south’s adjustment all the more difficult to achieve. Under a third of Germany’s current account surplus was with the eurozone in the first half of 2013, compared with over three-fifths prior to the financial crisis. But this shift is largely
due to falling German exports to the depressed periphery, rather than rising exports from the periphery to Germany. And even if the surplus with the rest of the currency union fell to zero this would be – according to the IMF – largely cyclical (reflecting the collapse in domestic demand in the periphery) rather than structural (reflecting a rebalanced eurozone economy); thus trade imbalances will re-emerge should demand recover across the eurozone. German policy-makers argue that a rebalancing of the German economy would be of little benefit to the currency union’s peripheral economies. After all, Spain’s exports to Germany only constitute 4 per cent of its output. A programme to drive up German domestic demand would simply reduce