The right balance

Germany atones for alleged current account sin

At first sight, Germany hasn't done anything to curb its bad habits. According to new Bundesbank data released on Monday, the country's current account surplus rose to seven per cent of gross domestic product last year, only slightly below its all-time record five years ago.

The policymakers and economists who argue that macroeconomic imbalances are at the core of the global economy's problems might be chagrined. Southern European countries like Spain, Greece and Italy lost international competitiveness and piled up huge current account deficits in the last ten years, with German surpluses the flip side of this unhealthy development. Rebalancing within the Euro zone requires that German surpluses come down.

In spite of the headline number, this is happening. In the last five years, the country's current account surplus with the rest of the currency union has shrunk by half, from four per cent of GDP in 2007 to two per cent in 2012. Last year, German imports from the Euro zone rose 1.1 per cent while exports shrank 2.2 per cent. The recession in Southern Europe, which hampered demand for German goods, only explains part of the trend. It plays both ways in any case by shrinking German imports as well: due to the large uncertainty, German companies were highly reluctant to invest in 2012. This weighted palpably on domestic demand and hence imports for machinery, IT equipment and other investment goods which account for almost a third of all German imports.

More heartening, a significant part of the current account development is due to structural adjustment and improved competitiveness in the periphery, as the Bundesbank already noted a few months ago. This is true for Germany as well. Wages are rising more than inflation, and employment is growing. This fuels consumer demand, chronically tepid for years. Imports of consumer goods increased by a strong 4.4 per cent in 2012 after a rise of 8.6 per cent the year before.

The German export performance on non-European markets - especially North America and South East Asia - tends to mask this intra-European adjustment improvement. A faster pace would be welcome but it is hard to achieve. The current account balance reflects decentralised decisions of millions of individual economic actors and is harder to influence than interest rates or budget deficits. May be time for Germany's partners to stop obsessing about its surpluses.