Imbalances, Which Require Monitoring and Decisive Policy Action

October 5th, 2015
in Op Ed

by Dirk Ehnts, Econoblog101

Inspired by Men Who Stare at Goats, the Macroeconomic Imbalance Procedure of the European Union ranks Germany in the category Imbalances, which require monitoring and decisive policy action.

Follow up:

The country report on Germany from June 2015 reads:

The current account consistently shows a very high surplus, which is projected to increase to 8 % of gross domestic product (GDP) in 2015.

Now the numbers are in and they confirm this forecast. The Irish Times has reported:

Germany's current account surplus will likely hit a new record of €250 billion euros in 2015, but it will lose the top spot to China, the Ifo think-tank said on Tuesday. [...]

Exports from Germany, traditionally the motor of the European economy, are being driven by the weak euro. A further €5 billion of its current account surplus can be attributed to cheaper crude oil imports, Ifo said.

Ifo said the German surplus would be equivalent to around 8.4 per cent of gross domestic product, meaning it would once again breach the European Commission's recommended upper threshold of 6 per cent.

It is somewhat amazing that the symptoms that led to the last crisis are there once again, only that now Germany is building up net assets from outside of the euro zone. As trade partners have flexible exchange rates this will end in tears, but this time it will be the "usual" financial crisis. The German export machine is a problem for the world economy. These surpluses are only sustainable if trade partners regularly default, since each German surplus requires a foreign debt to match. Debts, if they are private, cannot rise forever. The coming years will bring some more political and economic instability, I am afraid. The world pays dearly for the existing international monetary non-system, which is the reason why some net exporters cause trouble without being held responsible. Perhaps the IMF should be charged to develop an international monetary system that can improve the situation?

(My colleague Jan Priewe published a working paper on how developing countries can use a development strategy to cope with these problems and more. It is available here.)

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