Germany’s current account surplus will smash all records this year, risking a serious political showdown with Brussels and the ultimate sanction of EU fines.
A joint report by the leading German institutes, or “Wise Men”, said the country’s external surplus would keep rising to a modern-era high of 7.9pc of GDP this year, far above the 6pc limit set by Brussels under the new Macroeconomic Imbalance Procedure.
The Commission warned Germany late last year that it faced possible sanctions if failed to do its “homework”, either by boosting consumption at home or by weaning its economy off excess reliance on foreign markets. The threat caused consternation in Germany’s press and a vitriolic exchange with Brussels.
The rest of the eurozone can order Germany to present an “action plan” to bring down its surplus. If Germany is relegated to the “corrective” phase of the mechanism, and if it then fails to deliver on demands, the EU Council of Ministers can then demand that Germany pay a deposit of up to 0.1pc of GDP. This money is seized if Berlin still fails to remedy the imbalance.
“We are looking under the bonnet at the German economy and monitoring this closely. If there is systematic abuse, and they don’t respond, sanctions are available,” said an EU official. The fines are imposed by a “reverse qualified majority vote”, making it hard to block.
Such a procedure would amount to a court of judgment on Germany by EU peers, with explosive political consequences. The German public already think they are the cash cow for the EU, convinced they are bearing the cost for bailing out southern Europe and holding the euro together. Berlin says Germany’s export success helps all Europe and should be prized, not denigrated.
Germany first agreed to the new procedure thinking it would be used to punish deficit countries living beyond their means, or to prevent credit booms, deemed to have been the causes of the EMU crisis. German officials seem taken aback that Brussels would also look at the other side of the North-South trade gap.
The US Treasury is also stepping up pressure. It singled out Germany as a greater sinner than China in its latest report on trade and currency manipulation, criticising the country for failing to do more to lift the eurozone out of a protracted slump. Washington said Germany was creating a “deflationary bias” for the world economy, taking more than its fair share of scarce global demand.
Last year Germany exported twice as much to the US as it imported, a gap that has widened sharply over the past four years and is causing trade frictions. The implicit US criticism is that Germany has locked in a structural advantage through EMU, which prevents Germany’s currency rising as the D-Mark used to do. This creates a permanently under-valued exchange rate. It not only hurts Club Med but it also has secondary effects on non-EU countries.
The causes of the German surplus are complex but a key reason is Berlin’s quest for a budget surplus, to be 0.1pc of GDP this year and 0.5pc next year. This curbs growth of demand. Brussels said the German government is “over-achieving”, and needs to do more to boost infrastructure spending. Gross fixed capital investment fell 0.7pc last year, after dropping 2.1pc in 2012.
Germany fiscal squeeze is driven by fears of an ageing crisis. While understandable, it means that EMU crisis states have to cut even deeper to claw back competitiveness within monetary union. There are other causes of the chronic surplus. Consumers pay above market electricity, subsidising cheap power for the export industry.
The problem may slowly correct itself. The Wise Men expect German growth to pick up from 0.4pc last year to 1.9pc this year and 2pc in 2015. A new minimum wage of €8.50 next year will boost the incomes of the poorest, who spend a high share. Investment will at last rebound, jumping 4.8pc this year as industry meets pent-up demand for new equipment.
The risk is an ugly clash in the meantime between Germany and the EMU deficit bloc, poisoning the political atmosphere. “The worst nightmare of the German people is that they should find themselves under the government of Club Med debtors,” said Handelsblatt editor Klaus Engelen.