Our surplus, your problem: German success destabilizes the Euro

EPA/SVEN HOPPE

The president of the Ifo Institute for Economic Research Hans-Werner Sinn speaks during the institute's annual meeting in Munich, Germany, 12 June 2015

Our surplus, your problem: German success destabilizes the Euro


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The German economy emanated mixed messages on Tuesday.

Good News (for Germany)

The Munich-based Ifo think-tank on released on Tuesday a report that indicated that quantitative easing, low-interest rates, and record low energy prices have benefitted German exports.

The German current account surplus is expected to surge to € 250 bn in 2015. This surplus is in excess of the 8% of the GDP – 8,4% to be precise – which means that Germany breaches the recommended threshold. Globally, Germany appears to be second only to China, whose current account surplus is expected to surge by more than 40% year on year to € 292 bn, mainly because of fewer imports. Lower energy prices may have benefitted the German economy up to €5 bn according to Ifo.

Cheap energy and a cheap Euro is the driver of the German export engine. The Euro has depreciated against the dollar by 20% since July 2014. Given the fundamentals of the German economy, a Deutsche Mark would be much stronger. The underappreciated competitive advantage that boosts the German economy is the reason analysts have often suggested that Germany should exit the Euro, or that its excessive surplus is endangering to the Euro.

Bad News (for everyone)

Probably more focused on China than imbalances in the Eurozone, the Economic Sentiment for Germany declined in September. The ZEW index published on Tuesday projects that weakening exports due to emerging market growth deceleration (China). The economic sentiment is halved since August, reaching its lowest level in 10 months.

China was Germany’s fourth export market last year, and some analysts hope that less demand from China may be rebalanced by a steep fall in commodity prices.    

Spend more!

Washington, the IMF, and the European Commission have called for a generous rise in wages and public expenditure in Germany to rebalance the global economy and the Eurozone. Germany insists that it is the rest of the EU that should become more competitive.

The former President of the Fed, Ben Bernake, was arguing in April that Germany should spend more. His primary concern was the European inflation was well below the ECB’s 2% and extended high unemployment. These observations still stand; in fact, deflationary pressures have increased.

With an outsider’s view, Bernake argued that all currency unions with fixed exchange rates have historically collapsed for the same reason: “Countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure.”

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