Wed Aug 29th, 2012 at 05:53:51 AM EST
Eurointelligence is running another column of mine: The Eurozone's giant sucking sound (28.08.2012)
As reported two weeks ago, Germany's current account surplus is projected to exceed 6% for 2012, likely triggering a warning from the European Commission. Such large German current account surpluses are not new, what's new is that since November 2011 the European Commission's Macroeconomic Imbalance Scorecard includes a 6% threshold on the three-year moving-average current account balance (the threshold for deficits is 4%). Here I will argue that Germany's persistently high current account surplus is dangerous for the stability of the Eurozone and corrective government action is needed (in principle concerted Eurozone government action, but in practice requiring that the German government 'own' the policy).
You can read it there, and comment here.
This article fleshes out my comment in the Salon two weeks ago:
Modern monetary theory and the Eurozone
Germany's current account surplus may be so extreme in 2012 that it risks a warning from BrusselsWhere to begin? The Eurozone current account balance is close to zero, so Germany's current accout surplus is, euro by euro, the net current account deficit of the other 16 eurozone countries. Since German GDP is over 1/4 or Eurozone GDP (it was 1/4 in 2009 and the ratio must have improved given the implosion of Spain and Italy), Germany's surplus is 1.5% of overall Eurozone GDP. This means the average current account deficit of the rest of the Eurozone is 2% of GDP, towards Germany.
FT Deutschland reports that Germany's current account surplus is likely to exceed 6% of GDP this year, the threshold which triggers a European Commission warning. The article quotes Steffen Elstner of the Ifo Institute as saying that this threshold will be reached with certainty. Last year, Germany's surplus was 5.9%. Ifo had previously forecast only a modest increase, but due to weaker import numbers, the surplus is likely to be significantly larger - larger in absolutely terms than China. There was no comment from the Commission yesterday. The German government maintained its position that there was no problem with current account surpluses. On the contrary, the German economics ministry sees this a "very positive" development. The German government spokesman said yesterday that the problem of imbalances was a problem for a countries with large current account deficits.
In defence of surpluses
The German debate on this is unreal. A good example has been a comment by Philip Plickert writes in Frankfurter Allgemeine, who says that the term of a macroeconomic imbalance was questionable in itself. It says it makes no sense to force countries to have balanced current account positions, and it is impossible to control it anyway, except perhaps in China. He also argues that it is absurd to talk about surpluses and deficits in the same way. He says large deficits are a problem because the debt accumulation makes this unsustainable. Germany's surpluses, however, were the consequences of structural strength of the domestic economy, which is not a problem.
(It is interesting to note that German commentators seem to reduce both economic success and failure to purely structural issues, which is strange given the structure of the German economy has not changed all that fundamentally in the last couple of decades. Yet, they hardly ever pay attention to the real exchange rate.)
Since, by accounting identity,
(current account deficit) = (government deficit) - (private sector net savings)
this means that, if the government deficit stays within Maastricht bounds, then the private sector of the Eurozone ex-Germany can only net-save about 1% of GDP.
If Germany's current account surplus hit 9% of GDP, then it would be impossible, on accounting principles, for other Eurozone governments to stay within Maastricht bounds while allowing their private sectors to net-save. Definitely a very positive development demonstrating Germany's inherent strength and leading to unustainable debt accumulation outside Germany.