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EU starts investigating German current account surplus
November 13, 2013 / 12:26 PM / in 4 years

EU starts investigating German current account surplus

BRUSSELS (Reuters) - The European Commission decided on Wednesday to prepare an in-depth analysis of Germany’s persistently high current account surplus to find out whether it is a sign of a serious imbalance in Europe’s biggest economy.

File photo of rusty vintage car of Germany car manufacturer Opel parked in a street in Berlin March 11, 2012. REUTERS/Thomas Peter/Files

The long-running surplus has drawn criticism from the United States and European Union that Germany’s economy - the EU’s biggest and fourth biggest worldwide - is relying too heavily on exports and that Berlin should pay more attention to raising domestic demand to put growth on a sounder footing.

Germany has had a current account surplus in excess of 6 percent of its gross domestic product since 2007, meaning it exports far more than it imports from the rest of the world.

In September the surplus reached 19.7 billion euros - more than 8 percent of last year’s economic output - and was the biggest in the world, beating even China.

The EU will recommend steps to fix the imbalance if the review, due to be finished early next year, finds the surplus is harmful. But that is not a foregone conclusion.

“A high surplus does not necessarily mean that there is an imbalance,” European Commission President Jose Manuel Barroso told a news conference. “We do need to examine this further and understand whether a high surplus in Germany is something affecting the functioning of the European economy as a whole.”

The surplus highlights Germany’s success in staying competitive in the world economy, so criticism is politically tricky, because EU policy-makers encourage euro zone countries to undertake painful reforms to become more competitive and run a current account surplus, rather than a deficit.

Still, many EU governments would welcome higher domestic demand in Germany because it would give them a better chance to sell their own goods in the EU’s most prosperous market.

DOWNSIDE OF SURPLUSES

Relying too heavily on exports can leave a country vulnerable to a global shock because domestic buyers would not be able to make up for the drop in demand.

It also means that Germans are investing their savings abroad, making them vulnerable to events elsewhere and depriving their own economy of investment.

File photo of an old BMW automobile covered in dead leaves in a private parking lot on a cold and misty autumn morning in Hanau, 35 km (21 miles) south of Frankfurt, October 27, 2012. REUTERS/Kai Pfaffenbach/Files

Making economies more competitive is to be one of the five top policy priorities for all EU governments next year, the Commission said in an annual report.

But Germany’s surplus has become big enough to warrant closer scrutiny. Barroso said it could indicate that Germany could do more to rebalance the EU economy by raising German domestic demand and investment and opening up services.

In Berlin, government economic advisers criticized proposals to boost domestic demand through more generous social policies such as a minimum wage and pension increases that have been floated in talks on forming a government coalition.

Slideshow (2 Images)

They said such steps could undo the economic gains Germany achieved through wide-ranging reforms of its welfare state a decade ago.

Most of the advisers said that Germany’s current account surplus was not a problem because it was caused by strong demand for products made by German firms, although one, Peter Bofinger, called it “a problem for the global economy”.

The Commission analysis falls under new EU rules, in place from the end of 2011, that charge the 28-nation’s executive arm with checking that countries do not develop dangerous economic imbalances which could become a problem if not addressed.

A current account deficit larger than 4 percent of GDP or a persistently very large surplus above 6 percent are among the warning signs in the Commission’s scoreboard of around 30 economic indicators.

The in-depth review is likely to be finished in February or March next year. If it concludes that the surplus is excessive and therefore damaging to Germany and Europe’s economy, the Commission will recommend steps to rectify the problem.

But unlike countries which run excessive current account deficits, even if Germany were to ignore such recommendations, it could not be fined.

While the penalty for ignoring a Commission call to fix a current account deficit could be 0.1 percent of GDP, a current account surplus, even if excessive, carries no such fine, according to a letter sent by EU Economic and Monetary Affairs Commissioner Olli Rehn to the Polish EU presidency in November 2011.

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

Additional reporting by Michelle Martin in Berlin; Editing by Mark Heinrich and Giles Elgood

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