Germany's record trade surplus is a bigger threat to euro than Greece
Germany’s current account surplus is out of control. The European Commission’s Spring forecasts show that it will smash all previous records this year, reaching a modern-era high of 7.9pc of GDP. It will still be 7.7pc in 2016.
Vague assurances that the surplus would fall over time have once again come to nothing. The country is now the biggest single violator of the eurozone stability rules. It would face punitive sanctions if EU treaty law was enforced.
Brussels told Germany to do its “homework” a year ago, but recoiled from taking any action. We will see if Jean-Claude Juncker's commission does any better this time.
If not, cynics might justifiably conclude that big countries play by their own rules in Europe, and that Germany can defy all rules.
The EMU punishment machinery is highly political, in any case. The story of the EMU debt crisis is that the authorities persistently enforce a creditor agenda rather than macro-economic welfare (an entirely different matter).
This is the fifth consecutive year that Germany’s surplus has been above 6pc of GDP. The EU’s Macroeconomic Imbalance Procedure states that the Commission should launch infringement proceedings if this occurs for three years in a row, unless there is a clear reason not to.
There are few extenuating circumstances in this case. Germany’s surplus is not caused by a one-off shock. The surplus remains huge even if adjusted for lower energy import costs. It is a chronic structural abuse, rendering monetary union unworkable over time, and is surely more dangerous for eurozone unity than anything going on in Greece.
“The European Commission should stop pulling its punches: Germany should be fined,” said Simon Tilford, from the Centre for European Reform.
“Their surplus should be treated in the same way as the southern deficits were treated earlier, as a comparable threat to eurozone stability. What is so worrying is that the surplus would normally be falling rapidly at this stage of the economic cycle,” he said.
Germany’s jobless rate is at a post-Reunification low of 4.7pc. It should therefore be enjoying a surge of consumption. This it is not happening because the rebalancing mechanism is jammed. What this shows is the EMU remains fundamentally out of kilter, and doomed to lurch from crisis to crisis even if there is a recovery.
Any rebound in southern Europe will lead to the same build-up in intra-EMU trade imbalances, and therefore in the same offsetting capital flows, vendor-debt financing, and asset bubbles that led to the EMU crisis in the first place.
The International Monetary Fund warned last year that the German surplus – then 8.25pc of GDP when adjusted for the cycle - is destructive for EMU as a whole. It is between three and six percentage points higher than is either “desirable” or justified by fundamentals. It is not in Germany’s own economic interest, and makes it even harder for the EMU crisis-states to claw their way out of trouble.
The IMF said Germany’s exchange rate is undervalued by as much as 18pc under trade elasticity theory even then, before the more recent plunge in the euro. This was achieved by squeezing wages in the early years of EMU, undercutting the South.
Efforts by France, Spain, Italy, Portugal and Greece (super-competitive Ireland is irrelevant to this debate) to claw back lost ground by doing the same at this late stage is precisely what pushed the EMU system as a whole into a quasi-deflationary slump from 2011 to 2014.
Germany denies that it is a serial violator of the Macroeconomic Imbalance Procedure. It admits that EMU effects have left the country with an undervalued exchange rate but denies that this is the result of “policy distortions”, let alone a deliberate, cynical, self-interested strategy of mercantilist exploitation.
It is no mystery why the imbalance is getting worse. The German regulatory and tax structure is geared in favour of output and exports, and against consumption. It is the mirror image of Britain. Neither formula is healthy.
“Germany should cut taxes on low incomes and VAT. It has plenty of fiscal scope to do so. It chooses not to,” said Mr Tilford.
Berlin has refused to offset anemic demand with extra government spending. The "Ordoliberals" in the German finance ministry are instead running a budget surplus of 0.6pc of GDP in a near-religious glorification of savings.
They are doing this even as the Kiel Canal crumbles into the water and Germany’s infrastructure slowly falls apart. Marcel Fratzscher, head of Germany’s DIW Institute, and the author of Die Deutschland Illusion says investment has fallen from 23pc to 17pc of GDP since the early 1990s. Net public investment has been negative for 12 years.
German surpluses did not matter in the days of the D-Mark. The country revalued from time to time, correcting the problem. How Germany ran its own internal affairs were largely its own business. But as the IMF has repeatedly stated, it is an entirely different matter in a monetary union. The German surplus lies at the root of EMU’s North-South divide.
Under the Macro Imbalanced Procedure – which Germany wrote into law thinking it would only ever be used against deficit "sinners" - the eurozone can order Germany to present an "action plan" to cut the surplus. If that fails, EU ministers then sit in judgment on Germany. They can force Berlin to pay a deposit of up to 0.1pc of GDP (€2.4bn) into a special account, while it is on probation. Ultimately, this money can be seized if nothing is done.
Needless to say, any such sanction would cause outrage in the Bundestag and risk destroying German political consent for the euro. Most German citizens already think that their country is spending too much bailing out southern Europe.
We watch with interest to see how Mr Juncker chooses to navigate these treacherous political reefs, especially since he holds his current job by German patronage. It was Chancellor Angela Merkel who shoe-horned him into the Berlaymont last year against British objections.
With a few honourable exceptions - such as Mr Fratzscher – the German policy elites refuse to acknowledge that there is anything wrong with their surplus policy, or even that there is any need to discuss the subject at all.
This refusal to view matters from anybody else’s point of view is testing patience around the world. Germany has displaced China as the arch-villain in the US Treasury’s reports to Congress on currency manipulation, and for obvious reasons.
Chronic surpluses are a way of stealing demand from elsewhere. They export unemployment to other countries. This matters in an era of "secular stagnation" and excess global savings. Societies are entitled to retaliate once this gets out of hand.
Nor does this mercantilist policy make any sense for Germany itself. The surpluses are being recycled into capital flows abroad with a negative rate of return, eroding the wealth base that the country will need over the next 10 years as it goes into precipitous demographic decline. Historians will view the Schroder/Merkel era as a series of policy blunders.
The sooner Germany abandons fiscal fetishism and invests its own money in its own country for its own good, the better it will be for everybody.