Monday, November 04, 2013

Again on Germany's surplus

This column by James Mackintosh may be a little melodramatic in talking about "currency wars." (Germany feels US ire over war on currencies Financial Times 11/01/2013) But it does provide a useful description of Germany's current account surplus and why its economy needs greater fiscal stimulation, for its own good and the good of the eurozone.

There is no doubt slow domestic demand in Germany has made it harder for the rest of the eurozone to fix its problems. Equally, replacing the Deutschmark with the euro has given Germany an undervalued currency, setting up the country to export more this year than the US. According to International Monetary Fund data, post-Bretton Woods Germany has never had a weaker currency when adjusted for price inflation; based on wages its real exchange rate is a fifth weaker since 1995 and 10 per cent weaker than when the euro launched in 1999.

Germany itself should want to reduce its near-record 7 per cent current account surplus. The crisis demonstrated it is hopeless at investing its export gains overseas, showing it up as one of the biggest losers from US subprime, and heavily exposed to the eurozone periphery.

Still, Germany is showing some signs of rebalancing. German inflation has been higher than the eurozone average for six months, the longest period of the euro-era other than at the end of the 2007 boom. A major point in coalition talks under way in Berlin is the introduction of a minimum wage, which should help pay rise further. Consumption remains weak, but is rising and is expected to drive growth next year, when the current account is forecast to shrink. [my emphasis]
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