BRUSSELS – The European Commission may launch an “in-depth review” of the gigantic German current account surplus – in the framework of the so-called “Macroeconomic Imbalances Procedure” – on Wednesday, in a move that would signal the first “official” disapproval of Berlin’s economic policy by its European partners.
If the review concludes that Germany’s current account surplus constitutes an “excessive imbalance,” then next spring the Commission will provide specific recommendations to Germany in order to correct it. Theoretically, Germany could even be asked to pay a fine, equal to 0.1 percent of its GDP, if it accumulates more imbalances and fails to implement a corrective action plan. But at this stage this scenario appears remote to say the least. Still, the accusation of macroeconomic imbalances would be an embarrassment for Europe’s largest economy, whose leaders preach strict adherence to commonly agreed rules.
The procedure is part of an early warning and enforcement mechanism, which was set up in late 2011 in order to coordinate economic policy and governance in the EU and the euro area after the outbreak of the debt crisis. Despite being focused on the prevention of fiscal and current account deficits, the new rules also discourage excessive surpluses. More specifically, EU countries are not allowed to run a current account surplus averaging more than 6 percent of GDP over a three-year period. According to the latest data, Germany’s current account, boosted by impressively strong product exports, recorded a surplus of more than 6.4 percent of GDP between 2010 and 2012. Although the final decision on the in-depth review will be taken by the College of Commissioners, which convenes in Brussels on Wednesday, Economic and Monetary Affairs Commissioner Olli Rehn posted a blog on Monday warning that “Germany’s surplus has surpassed 6 percent of GDP in every year since 2007.”
Asked by Kathimerini to comment on the issue, Greek Commissioner Maria Damanaki also said that “Germany needs to provide assurances that it will use its surpluses in order to facilitate the normal functioning of the eurozone. These surpluses were built thanks to the common currency. Now, Germany has to protect the eurozone and particularly those members which face difficulties.
“I believe that the accumulation of idle current account surpluses constitutes an excessive macroeconomic imbalance that we finally have to address, in the context of European legislation, either through preventive or corrective measures,” Damanaki said.
Strong exports are a cause of pride for Germany, which attributes them to the quality and competitiveness of its products. But critics argue that the excessive surplus is also partly due to wage dumping, excessive savings and low investment in infrastructure and other fields that would boost domestic demand. “Investment in Germany has fallen from 21.7 percent of GDP in 2000 to 17.6 percent, a significantly lower proportion than in other eurozone countries… Meanwhile, private investment is set to fall again this year… Germany should create the conditions for sustained wage growth, for instance by reducing high taxes and social security contributions, especially for low-wage earners”, wrote Rehn in his blog.
Germany’s excessive surplus, and the fact that Berlin successfully managed to “transpose” its export-based economic model to the rest of the eurozone, have been blamed for many of the ills facing global economy today. In a recent article for Project Syndicate, influential Brussels-based economist Daniel Gros commented that the eurozone’s massive current account surplus is the main reason why emerging markets’ currencies are crashing: “Austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year.”
“This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China… Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated and (with the exception of China), swung into deficit,” Gros said.
According to the US Treasury, Germany’s massive current account surplus is also to blame for weak growth and deflationary pressures around the world: “Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy,” reads a recent Treasury report to Congress on “International Economic and Exchange Rate Policies.”
Moreover, a recent study by EU Commission economist Jan in ‘t Veld suggested that simultaneous fiscal and current account adjustment in German, throughout the crisis has had “negative spillover effects.” “The symmetry of the fiscal adjustments in all euro area countries at the same time has hampered this adjustment, with negative spillovers of consolidations in Germany and other core euro area countries further aggravating growth in deficit countries. These negative spillovers have made adjustment in the periphery harder, and have further exacerbated the temporary worsening of debt-to-GDP ratios in program and vulnerable countries,” argued Jan in ‘t Veld.
Finally, weak demand from Germany and the rest of the eurozone’s core is often cited as the main cause for the continuous upward pressure on the euro’s exchange rate, high unemployment in the eurozone and much lower inflation than what is needed for a true recovery.
But German officials, speaking to Kathimerini, remain dismissive. They argue that Germany’s current account surplus in relation to the rest of the eurozone has been halved over the last years. The same officials expect Germany’s current account surplus in relation to the rest of the world to diminish over the next three years. Moreover, they underline that demand in Germany is picking up and it is now a main driver for growth. In any case, they point out that the German government cannot dictate wage growth in Germany, because wages are agreed between social partners.
No matter the outcome of the dispute, history, it seems, is not without a sense of irony. Not long ago, it was the South’s deficits that were blamed for the weakness of the European economy. Now it is Germany’s surpluses that will stand trial…