Thoughts From Across the Atlantic

What Should Be Done About Germany’s Current Account Surplus?

On November 13, the European Commission released the Alert Mechanism Report (AMR) for 2014 as part of its annual cycle for identifying and addressing macroeconomic imbalances (the so-called Macroeconomic Imbalance Procedure). Based on a scorecard of macroeconomic indicators with indicative thresholds, the AMR identifies those countries for which an in-depth review of potential macroeconomic imbalances and corresponding policy recommendations will be conducted in the coming months (by the European Commission).

While this is the EU’s third annual Macroeconomic Imbalance Procedure, it marks the first time that the European Commission will conduct an in-depth review of Germany. Following Commissioner Olli Rehn’s November 11 editorial in the Frankfurter Allgemeine Zeitung titled “What trade surpluses have to do with the euro,” the announcement of the AMR two days later didn’t come as a surprise; however, the fact that the European Commission is getting serious about Germany’s current account surplus, which during the past three years has stood at 6.5% of GDP (marginally above the 6% indicative threshold in the AMR scorecard), has attracted considerable attention. For example, The Wall Street Journal ran an article titled “EU Adds to Pressure Over German Exports.”

Lost in translation: “trade surpluses and the euro” become “pressure over exports”

The WSJ correctly restated Rehn’s main argument—that the European Commission was worried about insufficient domestic demand in Germany. At the same time, the less attentive reader might have gotten the impression that Germany’s export success story was considered part of the problem. The original editorial, however, was much more analytical and nuanced.

Commissioner Rehn begins by saying that “nobody would like to criticize German companies for their global competitive success.” Later in the text, he voices concern that the eurozone’s overall current account is now in surplus, which “could bring the euro under the pressure of appreciation” (ibid); this is arguably his main point, judging from the headline (“What trade surpluses have to do with the euro”). He also refers to the basic macroeconomic identity that defines an economy’s current account balance as being equal to the difference between savings and investment while pointing out that “investment in Germany has been declining for a long time, from 21.5% of GDP in 2000 to 17.6% today, considerably less than in the other eurozone countries.” The original editorial further stresses that “more public and private investment not only creates demand in the short run, but also raises productivity in the longer term;” however, “a part of German savings was not put into productive investment, but, through banks in both Germany and elsewhere, went directly or indirectly into loans pumped into asset and real estate bubbles.”  While Rehn mentions that Germany could ease its tax burden on low wage earners as a way to eliminate bottlenecks on domestic demand, he also addresses the need to further liberalize Germany’s service sector.

What Germany should (not) do

In a previous blog post, we already argued that reducing the competitiveness of the German economy should not be part of the solution to the German trade surplus issue, and that doing so would actually harm the eurozone as a whole including, its southern member states (see ). The only way to create a win-win outcome is not for Germany to export less, but for Germany to consume, invest and import more. In our opinion, this is also the point that the European Commission is making.

While Rehn has not been very specific about the particular measures that Germany should take, it is apparent that tax incentives for private investment and increased public investment could be in the cards, given the investment shortfall and some room for maneuver on the fiscal front. Another elephant in the room could be the German Value Added Tax rate. At the beginning of 2007, Germany’s grand coalition government of the time raised the VAT rate from 16% to 19%, the largest such increase since 1949. The size of this tax increase may have been an overreaction to five consecutive years (ending in 2005) of budget deficits in excess of 3% of GDP. Peer Steinbrück, a member of the Social Democratic Party of Germany and then finance minister, argued that “only a state that has room for financial maneuver can invest in education, infrastructure and the future. Sometimes unpopular decisions have to be made in the interest of the society.” At present, Germany looks poised to be governed again by a grand coalition. Maybe it is time to partly reverse the decision made seven years ago and reduce the VAT rate, say, from 19% to 18% or 17%.  This would represent an “internal revaluation,” as opposed to the “internal devaluation” option often prescribed for countries in Southern Europe as a way to regain competitiveness.


The European Commission is now involved in annual reviews of macroeconomic stability of EU member states. The Commission has established standards for what constitutes excessive current account surpluses or deficits that are analogous to the earlier limits on the permissible size of budget deficits and government debt relative to GDP in the Maastricht Treaty and the Stability and Growth Pact. The limits are part of a broader effort to establish pan-European banking, fiscal, and economic policies within the EU. The reaction by German authorities remains to be seen.  They could accept the limits as useful advice that all members should take seriously, or they could interpret the current account limits as being no more binding than the stated limits on budget deficits and debt that have been frequently violated by most members, including Germany. If the new limits are advocated by the Commission but widely ignored by members, this would further reduce the credibility of Eurozone rules, though.


European Commission (2013), “Alert Mechanism Report 2014,” 13 November

Grennes, Thomas and Andris Strazds (2012), “Is Germany Ubercompetitive and Should it Accept Higher Inflation?,” EconoMonitor, 18 July

Rehn, Olli (2013), “Was Handelsüberschüsse mit dem Euro zu tun haben,” FAZ, 11 November

The Wall Street Journal (2013), “EU Adds to Pressure Over German Exports,” 11 November (2007), “Mehrwertsteuer steigt von 16 auf 19 Prozent,”

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