Gunning for Germany’s surplus

Is Germany beggaring its neighbours by running a large trade surplus? Emily Hohler reports.

"The criticisms that hurt are those one suspects might be fair", says Martin Wolf in the FT. "This might explain the outrage from Berlin last week over the criticism by American officials of Germany's huge and vaunted trade surplus", which is set to reach 7% of output this year.

A report by the US Treasury concluded that, by maintaining surpluses throughout the financial crisis, Germany had "hampered rebalancing" for other eurozone countries and created "a deflationary bias for the euro area, as well as for the world economy". The International Monetary Fund has expressed similar concerns.

German politicians have described the criticisms as "incomprehensible", saying that their policies have been "impeccable" and that their exports "contribute significantly to global growth" but that's simply not true, says Paul Krugman in The New York Times.

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Last year, Germany overtook China, running the world's biggest current-account surplus. True, it has been running big surpluses for nearly ten years, but initially these were matched by large deficits in southern Europe that were financed by large inflows of German capital. "Europe as a whole continued to have roughly balanced trade."

After the financial crisis hit, these inflows collapsed. Debtor nations were forced into austerity measures to eliminate their trade deficits, but Germany failed to make any adjustments. It has continued to run surpluses while refusing to spend more, even as its neighbours were forced to spend less. The result is a "persistent shortage of demand" that magnifies the pain of austerity.

In a globally depressed economy, a country that runs a trade surplus is "beggaring its neighbours" by diverting spending away from other goods and services to its own.

In addition, there's the contribution the surplus has made to the euro's unwanted strength, says Ambrose Evans-Pritchard in The Daily Telegraph. The currency has surged by 9% against the dollar from June to early October and by 28% against the Japanese yen in a year.This is a "bizarre state of affairs for a currency bloc struggling out of recession.

Weak prospects normally mean a weak currency, but there is nothing normal about Europe's monetary union." The currency is now "far too high" for two-thirds of the euro states and is a "key reason" why unemployment hit a peak of 12.2% in September.

It is pushing Europe's debtor nations into "thirties-style deflation", making it impossible for them to dig their way out of debts that are rising in value in real terms as their economies contract.

Francois Heisbourg, the French head of the International Institute for Strategic Studies, is calling for the euro to be "put to sleep", saying that "creditor and deficit states" are being pitted against one another.

The European Union has finally weighed in, threatening "a probe of Germany's trade surplus", say Patrick Donahue and James Neuger on Bloomberg.com. Olli Rehn, EU economic and monetary affairs commissioner, added to calls to boost German consumption and wages.

Ultimately, countries can be fined for failing to correct imbalances under a euro-area law, "a regulation which Germany endorsed as part of the response to the debt crisis".

Emily Hohler

Emily has extensive experience in the world of journalism. She has worked on MoneyWeek for more than 20 years as a former assistant editor and writer. Emily has previously worked on titles including The Times as a Deputy Features Editor, Commissioning Editor at The Independent Sunday Review, The Daily Telegraph, and she spent three years at women's lifestyle magazine Marie Claire as a features writer for three years, early on in her career. 


On MoneyWeek, Emily’s coverage includes Brexit and global markets such as Russia and China. Aside from her writing, Emily is a Nutritional Therapist and she runs her own business called Root Branch Nutrition in Oxfordshire, where she offers consultations and workshops on nutrition and health.