Germany under the microscope

  • German trade surplus causes the rest of Europe to suffer.
  • Today, the European Commission will decide whether to focus on the issue.

After years of listening to the European Commission criticize southern European countries, and not only them, for their costly policies and insufficient reforms, it was Germany’s turn to receive a lesson. Wednesday the Commission may decide whether to focus on the risk of imbalances in the European economy by opening an “in-depth analysis” of Germany. The reason is the outrageous surplus in the German current accounts balance – a reflection of its trade surplus.


The controversy has been raging for the past several weeks. Even the American Secretary of the Treasury had a few severe words to say on the subject. In the past few days the European Commissioner for financial and monetary affairs, the fearsome Olli Rehn, let it be known that he was in favor of opening an “in-depth analysis.”


This process, planned as a result of the Greek crisis, gives the Commission oversight of economic indicators for all member states to prevent serious problems and the crises that may follow. One of the indicators is the current accounts balance. If the indicator is positive, the country exports more than it imports. If the indicator is above 6% over a three-year period, it is considered potentially destabilizing for the European economy. In Germany’s case the current accounts balance has been above 6% since 2007! The Commission believes that it will be at 7% this year after reaching the same level in 2012. It’s a world record, surpassing even China.


Germany “boosted” its exports by drastically reducing labor costs about a dozen years ago, while the southern countries increased them, thus financing German imports. Neighbors can’t be criticized for being open to increasing imports, but German domestic demand remains very weak – another consequence of a real drop in earnings. Economists point to another reason – the very weak level of investment, both public and private. “Germany has the weakest level in Europe,” explains Zsolt Darvas, an expert from Bruegel, an international study center based in Brussels.


“Since the 2010 recovery, wages have been starting to grow,” says Sabine Le Bayon, researcher at the French office of economic trends (OFCE), “but this growth has not yet compensated for past gaps.” Additional wage adjustments will have to wait for negotiations by the next government coalition between Angela Merkel’s conservatives and the social democrats. However, that will not be enough. In last spring’s recommendations the European Commission advised Germany to stimulate its domestic demand through tax incentives to businesses and greater liberalization of industries that remain overly protected – especially services.


After years of austerity and reforms recommended by Germany, who held itself up as an example to the rest of Europe, a consensus has begun to emerge on the need for Germany to fulfill its role of economic powerhouse with greater responsibility. “That will reinforce Germany’s performance and well-being, while reducing its domestic inequalities. It will also have a significant impact on the Eurozone economy,” Commissioner Rehn wrote in his blog on Monday. He was visibly concerned in showing the Germans that it is in their interest to open the valves on consumption, and thus on imports.


In European circles the matter is no longer if the Commission will launch an  “in-depth analysis” ( the surplus in current accounts is becoming too significant and long lasting to be ignored ), but if the Commission will have the political courage to perform a complete economic analysis on the dangers of imbalances.


What would be the ultimate goal of this analysis? If the Commission concludes that the dangers are real, it would be required to demand that Germany begin corrective actions. If Germany does not make sufficient efforts and does not succeed in reducing the “imbalances,” the Commission could go so far as to impose a penalty.


A penalty on Germany? The possibility seems truly far-fetched. However, it’s likely that simply opening an in-depth analysis will weigh heavily on Germany’s internal debates.


This is provided that the Commission accepts the role of policing Germany in the way it did for other European member states.



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