Germany faces more EU calls to boost demand after surplus probe
Germany faces stepped-up European Union calls to boost investment and demand after EU regulators said the country’s trade surplus poses a threat to the euro-area economy.
The European Commission said a four-month probe of Germany’s current-account surplus revealed a macroeconomic imbalance that may undermine the 18-nation euro. Separate inquiries confirmed various imbalances in 13 other EU countries including France, Italy and Spain, with Italian public debt deemed “excessive.”
The German surplus, which has been at or exceeded the EU’s 6 percent threshold every year since 2006, could cause the euro to appreciate on foreign-exchange markets and thereby hinder peripheral European countries’ efforts to regain competitiveness through internal devaluation, the commission said when it opened its inquiry in November.
“Germany is experiencing macroeconomic imbalances, which require monitoring and policy action,” the commission, the 28- nation EU’s regulatory arm, said in a summary of the investigation released on Wednesday in Brussels. “The policy priorities should be on strengthening domestic demand and medium-term growth.”
The warning to Europe’s largest economy follows four years of European debt-crisis management shaped by German insistence on budget austerity, which deepened recessions in some euro-area nations. The austerity drive has been reinforced in a new, German-championed package of EU laws making sanctions more automatic against spendthrift governments.
The package now threatens to sting German policy makers because, in addition to the measures to control deficits and debt, it has lesser-known provisions on macroeconomic imbalances including trade surpluses. After recommendations tied to enhanced European economic-policy coordination, the beefed-up rules allow for sanctions against euro-area countries that repeatedly fail to tackle a severe imbalance.
As the euro area seeks to bolster the economy after emerging last year from its longest recession, the spotlight is shifting to growth-boosting policies. The U.S. Treasury in October blamed German surpluses for weakening European and global growth, calling Germany’s domestic demand growth “anemic.”
“Rather low private and public sector investment combined with subdued private consumption over a longer period contributed to modest growth, falling trend growth, increased dependence of the economy on external demand and the build-up of a sizable and persistent current-account surplus,” the commission said on Wednesday.
“Central policy challenges, therefore, are higher investment in human and physical capital, further strengthening of labor supply and promoting efficiency gains in all sectors of the economy, including by unleashing the growth potential of the services sector.”
Of the 13 other countries found to have macroeconomic imbalances, the commission cited France’s “deterioration” in the trade balance and in competitiveness; Spain’s “very high stock of private and public debt;” and Italy’s “very high level of public debt and weak external competitiveness.”
The commission gave Italy, where public debt rose to an estimated 133 percent of gross domestic product last year from 127 percent of GDP in 2012, a sterner warning by declaring the Italian imbalances “excessive.”
These “are ultimately rooted in the country’s protracted sluggish productivity growth and require urgent and decisive action to reduce the risk of adverse effects on the Italian economy and the euro area,” the commission said.
The imbalances of two other countries — Slovenia and Croatia — were also deemed excessive.
Slovenia, a euro member, faces risks stemming from losses in cost competitiveness, corporate debt overhang and higher government debt, while non-euro EU member Croatia has “vulnerabilities” arising from “sizable” external liabilities, declining export performance, “highly leveraged” companies and “fast-increasing” general government debt, according to the commission.
The commission stopped short of recommending that EU governments place Italy, Slovenia and Croatia in an “Excessive Imbalance Procedure,” saying it would re-assess that step in about three months. Such a procedure would bring the countries closer to possible sanctions of as much as 0.1 percent of GDP.
The other nations found to have imbalances are Belgium, Bulgaria, Finland, Hungary, the Netherlands, Sweden, the U.K. and Ireland.
The commission’s findings from all its imbalance probes will feed into the next step of European budgetary coordination due to take place in June.
[Bloomberg]
