The issue has now come to Europe. Last month the European Commission decided to launch an investigation within the framework of the recently created Macroeconomic Imbalances Procedure (MIP) to determine whether the German surplus can be deemed excessive. If it concludes that this surplus is creating severe difficulties within the EU, it will recommend opening an “excessive imbalance procedure”, ultimately opening the way to pecuniary sanctions.
It is not the first time that the German surplus issue arises in European policy discussions, but it is the first time that it gives rise to a formal investigation. The MIP was adopted in 2011 in response to the euro crisis, after it had been observed that countries like Spain and Ireland had had apparently sound budgetary positions in the run-up to their crises, but had recorded very large external deficits (to the tune of 10% of GDP for Spain and 6% for Ireland). It was thought that proper surveillance of external imbalances would help prevent future crises.
In the negotiations about the procedure, a discussion arose over the treatment of surpluses. Several member states argued that surpluses could be as detrimental to stability as deficits. They had John Maynard Keynes on their side: he famously observed that when large surpluses and deficits coexist, adjustment is “compulsory for the debtor and voluntary for the creditor” and that this asymmetry created a global deflationary bias. Germany, however, was adamant that excess borrowing can result in the debtor being unable to repay its debts, thereby creating financial instability, whereas no such danger exists with excess lending. In the end the compromise was to adopt asymmetric indicative alert thresholds: 4% of GDP for deficit countries but 6% for surplus countries.
Germany felt safe. But in 2012 its surplus reached 7 per cent of GDP, thus prompting an investigation. Europe has therefore started a debate as to whether this surplus is a problem and for whom.
German official and most German economists strongly deny the existence of a problem. They argue first that Germany’s export successes are good both for Germany and for Europe, adding that nobody would benefit from and artificial weakening of German competitiveness; second, that the German surplus is the result of a market process and not a planned policy; third, that as the EU is not a closed economy, German surpluses do not imply deficits in other EU countries.
Jean Pisani-Ferry
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