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Report on macroeconomic imbalances: a warning note for Germany

On 15 November, the European Commission (EC) published its annual Alert Mechanism Report on  macroeconomic imbalances which studies the trends in ten economic indicators in European Union countries to highlight possible imbalances that could affect growth in the medium term. These indicators are used to decide whether it is necessary to review a country's economy in depth. If the country does not take measures to correct  such imbalances, the EC can impose economic sanctions. The EC has decided that it will carry out this analysis
on seventeen countries, thirteen of which have already been reviewed this year. The new countries are Croatia, Luxembourg and... Germany. The inclusion of Germany might seem surprising as its growth is the motor for the euro area's incipient recovery.

Germany has been included in the group for two apparently contradictive reasons: (i) an overly large current account surplus and (ii) a loss of export share. This loss of export share is particularly due to the strong growth in exports of emerging countries and not because German exports are falling. We will therefore concentrate on its current account surplus. Over the last three years, this has been 6.5% of GDP on average, higher than the 6.0% set by the EC as a limit. The idea that a current account surplus may be bad for an economy does not seem logical. What is the problem of selling more products abroad than those bought from other countries?

In part, a current account surplus reflects a virtue of German manufacturers, who have been able to take advantage of the appearance of a medium-upper class in emerging countries to increase their exports. Moreover, the fact that Germany shares a single currency with weaker countries means it can access international markets with a cheaper currency. In other words, if the German currency was still the mark, its value would be higher than the current euro. This acts like a subsidy for German goods. The current balance between Germany and the periphery countries (for example, Spain, Greece and Portugal) was close to zero in 2000, peaked in 2008 and has been narrowing since the Great Recession. The difference is that, while this divergence was symmetrical before the crisis, with an increase in the surplus in Germany and an increase in the deficit in periphery countries, now it is asymmetrical. Between 2008 and 2012 Germany's current account remained constant while the periphery countries adjusted their GDP by almost
10 pp. Seen in this way, it would seem as if no adjustment has occurred in Germany with regard to the euro area. But nothing could be further from the truth. Germany's surplus has remained constant thanks to the increase in the surplus compared with countries outside the euro area and a reduction in its surplus compared with euro area countries.

However, a large and persistent current account surplus could indicate the emergence of internal economic imbalances in the German economy. The surplus might be caused by a fall in investment or relatively low levels of consumption. In Germany, investment in 2000 was 22.3% of GDP while in 2012 it was 17.3%, slightly below the  18.6% of the euro area or 19.0% of the USA. This negative trend in investment (which accounts for 57.4% of the increase in the surplus) could reduce the German economy's potential output. Moreover, wages have also remained highly contained over the last decade. Between 2000 and 2007 these grew by 2.0% (average annualised change) and from 2007 to 2012 by 1.5%. Although it is true that this has helped the German economy to gain in  competitiveness, it has also hindered consumption's capacity to grow. In fact, one of the first measures Merkel's new government wants to introduce is a minimum wage but the effect this might have on consumption depends on how it is ultimately designed. If the minimum wage is set at a national level instead of regional, it could lead to a rise in unemployment as the wage disparity between the east and west of Germany is still considerable.

In short, the in-depth study of the Germany economy to be carried out by the EC should focus on determining whether its levels of consumption and investment might end up harming medium-term growth. An apparently surprising alert now that the German economy is leading European growth but one that must be monitored carefully.

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