At first it was just the US administration that criticised Germany harshly for running high external surpluses. Now even the European Commission is starting an investigation in the context of the eurozone’s imbalances procedure, as Commissioner Olli Rehn said at a press conference in Brussels on November 13

Müller, Henrik

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Eurocrisis in thePress11/15/2013The Rift Over Germany’s Trade Surplusblogs.lse.ac.uk /eurocrisispress/2013/11/15/the-rift-over-germanys-trade-surplus/By Henrik MüllerAt first it was just the US administration that criticised Germany harshlyfor running high external surpluses. Now even the EuropeanCommission is starting an investigation in the context of the eurozone’simbalances procedure, as Commissioner Olli Rehn said at a pressconference in Brussels on November 13.This is new. Germany has been running high current account surplusesfor years, but until now relatively little pressure has been put on thefederal government to take action. The new rhetoric suggests thatpatience may be running out. Even EU sanctions against Germany areconceivable.Interestingly, public opinion in Germany reacted virtually in unison (arare event given the country’s heterogeneous media system). The prevailing view was that the accusations were ill-advised, dead-wrong and driven by envy of Germany’s overwhelming competitiveness rather than by propereconomic assessment. The government, business representatives, economists and media representatives werequick to reject the US interpretation, namely that the “anemic pace of domestic demand growth” was causing “adeflationary bias for the euro area, as well as for the world economy”. Germany was put “in the pillory”, the newsmagazine Der Spiegel wrote, in line with the often-heard argument that the country was a scapegoat as othernations suffer from past economic mistakes.“The Germans are outraged”, Nobel prize-winning economist Paul Krugman commented in The New York Times,finding the Berlin government’s arguments “just bizarre”. The Financial Times’ Martin Wolf thought Germany neededa lecture in economics (which he was happy to provide).Such sharply contrasting views are not confined to the question of current account surpluses, but can also be foundregarding other economic issues. The highly critical reaction to the ECB’s interest rate cut on November 7 in theGerman media is another case in point. While the divergence in public sentiment may be understandable given thecentripetal economic forces at play within the Euro area, it is still troubling. With Germans feeling more and morecomfortable in playing the outsider’s role, political consensus in Europe may be ever harder to reach, perpetuatingthe economic crisis.What is going on here? Why do Germans collectively feel rebuked when it comes to external surpluses? Theanswer, from my point of view, has three dimensions: history, economy and policy.Start with history. Running external surpluses is a matter of German national pride, more than it is in other countries.Ever since the late 19th century, when the label “made in Germany” became a symbol of the catch-up of the“Deutsche Reich”, Germans have considered themselves an industrial nation whose international competitivenessserves as a gauge of collective self-esteem, as I have argued elsewhere. So criticising external surpluses meanscriticising a foundation of the nation.Turning to the economy, (West) Germany has been a surplus country for most of the time since World War II, thoughsurpluses from the 50s to the 80s were not as high as they have been since the latest German economic revivalafter 2005, peaking at 8 per cent of GDP in 2007. Even after the Great Recession of 2009, current accountsurpluses remained between 6 to 7 percent. These figures clearly are too high. The huge surplus may beGermany’s next top problem – because, in the first place, it makes the German economy vulnerable to external1/2shocks. It is far from obvious, though, that it is a problem for the rest of the euro area or even for the world economyas a whole.A closer look at the trade figures reveals that German industry is running big surpluses vis-à-vis emerging marketcountries, and not anymore vis-à-vis the rest of the euro area. Within the currency union a rebalancing can beobserved, albeit at a painfully slow pace. These trends lead to the question whether it hurts Spain, say, if Germanyis running a substantial surplus vis-à-vis China or Indonesia? Probably not. All this shows: assessing balance ofpayments positions of an open economy that’s part of a currency union may result in ambiguous conclusions.So what about policy? What are the instruments at hand? If Germany still had an individual currency, the answerwould be straightforward: let the exchange rate appreciate. That’s what China was told and has done in recentyears. In the context of the eurozone, though, a stronger currency would do harm to struggling economies such asItaly or Spain. Therefore, a real appreciation is needed, i. e. wages and prices in Germany have to rise faster than inthe rest of the eurozone. This type of market-based rebalancing is underway, but it may take too long to be politicallyacceptable in countries suffering from very high unemployment, such as Greece, Portugal or Spain.If wages are to rise faster, how could this be achieved? After all, in Germany wages are set in a decentralisedfashion. They are an outcome of labour market developments. This is not a command and control economy.Furthermore, large numbers of immigrant workers – net immigration, mainly from Southern and Eastern Europe, isnow close to 400 000 people per year – contribute to on-going wage moderation.In theory, expansionary fiscal policy could be an option. Indeed, the on-going coalition talks in Berlin suggest thatthe next “Grand coalition” government is on a spending spree. But with government debt high – the debt-to-GDPratio is still above 80 per cent – the room for manoeuvre is limited. More fundamentally, it is questionable whether itwould help Europe’s weaker economies, if Germany (the last large euro country with a triple-A rating) lost its statusas a prime borrower. Who would provide credible backing for the ESM, the eurozone’s rescue fund, then?There is one obvious policy instrument by which the current account surplus could be cut: transfers. If other toolsare not at hand, transfers from Germany (and other prospering eurozone regions) to struggling regions will have toplay a part in rebalancing the currency area. Tellingly, virtually all the other currency areas on the globe have suchtransfer systems. To introduce a pan-Euroland unemployment insurance, for instance, as France’s presidentFrancois Hollande has suggested, would be a good idea. But given the self-complacent mood in the German public,and especially in the media, such an approach does not look too likely.____________________Henrik Müller is a professor of economic policy journalism at TU Dortmund University, Germany.Note: This article gives the views of the author, and not the position of the Euro Crisis in the Press blog, nor of theLondon School of Economics.2/2

The rift over Germany’s trade surplus

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