UPDATE 1-Merkel defends German surplus against international criticism

Thu Nov 21, 2013 6:31am EST

By Stephen Brown

BERLIN Nov 21 (Reuters) - Chancellor Angela Merkel on Thursday defended Germany against international criticism that it was not doing enough to reduce its high trade surpluses and rejected the idea that it should deliberately weaken its competitiveness.

Speaking in Berlin, Merkel said it was "absurd" to suggest German companies should reduce their quality or that wages in the export sector should be higher to weaken their competitive strengths.

"It cannot and should not be the case that anyone tries to weaken Germany's competitiveness artificially," Merkel said.

International criticism has mounted that Europe's largest economy must do more to spur domestic demand and that its reliance on exports is hampering Europe's economic stability and hurting the global economy.

The U.S. administration reprimanded Germany late last month in its semi-annual report to Congress for its economic imbalances. Germany's current account surplus, at 19.7 billion euros in September, is the biggest in the world.

European Commission President Jose Manuel Barroso has issued a similar message: Germany has "homework" to do on stability in the euro zone.

The trade surplus alone hit a record high in September as exports rose. The seasonally adjusted trade surplus widened to 18.8 billion euros from 15.8 billion in August.

Germany argues it has more than halved its current account surplus with the euro zone as a share of GDP since 2007.

Germany shed the label of "sick man of Europe" after reunification in 1990 partly through years of wage restraint that made it more competitive. Its economy is now outpacing its peers and it is under pressure to do more to help the euro zone out of its crisis by stimulating domestic demand and buying in more imports from the rest of the currency bloc.

Germany has exported more than it imports since 1952. Its trade surplus is largest vis-a-vis France, the United States and Britain.

Berlin's critics say its overall current account surplus last year was 6.9 percent of GDP - well above the 6 percent threshold the European Commission considers excessive.

They say Germany is still saving too much and needs to liberalise its service sector to boost domestic demand.

Separately, Merkel said on Thursday that Germany is ready to work on European Union treaties in order to introduce a European banking union that would both police banks and find joint solutions to their problems.

Banking union would put the European Central Bank in charge of policing lenders from late next year and ultimately form a united front across the euro zone to back ailing banks or close them down.

Germany is attempting to weaken a central plank of banking union, namely that the euro zone clubs together to tackle frail banks, for fear that as the richest member it will end up footing much of the bill. Instead, Berlin wants losses imposed on bank creditors, including bondholders, once stress tests identify the weaker lenders.

The debate about who pays for the clean up of Europe's banks is set to continue to hamper Europe's most ambitious reform since the inception of the euro currency in 1999.

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