10 November 2013

Simon Nixon: Germany's surplus isn't the problem

Efforts would be better directed towards urging weak economies to make themselves strong, rather than urging Europe's strongest economy to make itself weak, comments Nixon in the WSJ.

In recent weeks, critics have identified a new eurozone fault line: Southern Europe, they say, is being strangled by a combination of deflation and German mercantilism. The US Treasury last week pointed to Germany's vast current-account surplus of 7 per cent of gross domestic product in 2012 as evidence that the country should be doing more to boost domestic demand and reduce its reliance on exports at a time when other eurozone countries are being forced to implement austerity policies. But to some European eyes, this new assault is as misdirected as past criticism of the eurozone's crisis response.

What does the US want Germany to do? Quit the euro? Make itself uncompetitive again, perhaps by forcing up wages? How would that help Southern Europe? Indeed, in an increasingly integrated single market, focusing on Germany's surplus in isolation is simplistic. Other Member States have benefited from German competitiveness gains because they are integrated into Germany's supply chain or have received direct German investment.

This focus on Germany's current-account position risks obscuring the real issues. A sustained recovery in Southern Europe hinges on businesses having the confidence to start investing again after five years of underinvestment, including in Germany. This in turn will give consumers the confidence to start spending, causing deflationary pressures to ease and Germany's current-account deficit to shrink.

But for businesses to start spending, they need confirmation that governments are serious about tackling the root causes of the crisis: That means creating a credible Banking Union and pushing ahead with structural overhauls to boost competitiveness.

Both objectives currently hang in the balance. Over the next few weeks, eurozone leaders face difficult decisions on bank resolution arrangements and common backstops for the ECB's forthcoming comprehensive assessment and stress-testing of bank balance sheets. Done properly, this exercise will drive the recapitalisation and restructuring needed to revive funding markets and ensure banks are able to support a recovery.

The current Southern European governments know what they need to do—and they have all survived political crises this year and appear to be much more stable than seemed possible a few months ago. Even in Italy, some argue that the waning influence of former Prime Minister Silvio Berlusconi is creating political space for more radical reforms.

Even so, the domestic obstacles to reform are considerable. Recent history suggests external pressure can certainly play a useful role in pushing Europeans to act decisively. But those efforts would be better directed to urging weak economies to make themselves strong, rather than urging Europe's strongest economy to make itself weak.

Full article

© Wall Street Journal