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[Euro area] expansion was supported by domestic demand growth in Germany - though growth in Germany still continues to rely on positive net exports, which continues to delay the euro area’s external adjustment process – and on domestic demand in France. Economic conditions across the euro area remain uneven with the countries in the periphery remaining in recession overall. Ireland and Portugal expanded on a quarter-on-quarter saar basis in the second quarter, but this may have been the result of transitory factors such as weather, and the economies of Greece, Italy, and Spain continued to contract during the same period, albeit at a more moderate pace...
Euro area deficit countries have sharply reduced their current account deficits, but euro area surplus countries have not reduced their current account surpluses. The euro area's overall current account swung into surplus in 2012, and the surplus has increased further in the first half of 2013 to almost 2.3 per cent of GDP. The Netherlands and Germany have continued to run substantial current account surpluses since 2011, while the current accounts deficits of Italy and Spain and the smaller economies in the periphery have contracted significantly, primarily as a result of a collapse of domestic demand and falling wages. Ireland, Italy and Spain have run surpluses in recent quarters, and Portugal moved into surplus in the second quarter of 2013. Germany’s current account surplus, meanwhile, rose above 7 per cent of GDP in the first half of 2013, with net exports still accounting for a significant portion (one-third) of total growth in the second quarter, suggesting that rebalancing is not yet occurring domestically. To ease the adjustment process within the euro area, countries with large and persistent surplus need to take action to boost domestic demand growth and shrink their surpluses. Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China.
Germany’s anaemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy. Stronger domestic demand growth in surplus European economies, particularly in Germany, would help to facilitate a durable rebalancing of imbalances in the euro area. The EU’s annual Macro-economic Imbalances Procedure, developed as part of the EU’s increased focus on surveillance, should help signal building external and internal imbalances; however, the procedure remains somewhat asymmetric and does not give sufficient attention to countries with large and sustained external surpluses like Germany.
In 2012, the euro area, in aggregate, undertook one of the most aggressive fiscal consolidations of the advanced economies despite having the smallest cyclically-adjusted fiscal deficit and weak growth prospects. While the pace of consolidation has moderated somewhat this year, the euro area structural fiscal deficit is expected to decrease by another 0.9 per cent of GDP in 2013. Under the Excessive Deficit Procedure, most of the major euro area economies initially had committed to reducing their general government budget deficits to less than 3.0 per cent of GDP by 2013. The EC, however, has adopted some flexibility in enforcing country targets, focusing on a country’s structural effort even if annual headline targets are not met due to weaker than expected growth. Germany met the 3 per cent target in 2011 and achieved a small surplus in 2012. Ireland, Greece, and Portugal have been given more time under their reform programmes, and recently, Spain and France were given two more years (Spain through 2016 and France through 2015) and the Netherlands an additional year to meet this 3 per cent target. Nonetheless, the US Treasury remains concerned about the appropriate pace of consolidation and the need to provide room for countercyclical policy responses while ensuring credible paths to fiscal sustainability over a timeframe that is sensitive to cyclical developments.
In response to the US criticism of Germany’s export-led growth model, the German Economy Ministry said that there were "no imbalances" in its economy and that its current account surplus was not a cause for concern. "The current account surpluses are a sign of the competitiveness of the German economy and global demand for quality products from Germany", said a spokesperson. The Irish Times quotes Merkel as having said that her government had done enough to spur consumption, while championing Germany’s export-heavy policy as a model for others to follow.
"The innovative German economy contributes significantly to global growth through exports and the import of components for finished products", a finance ministry spokesman was quoted in the Financial Times (subscription). Gerhard Schick, finance spokesman for the opposition Greens, said Germany's willingness "to take advice from Washington has decreased massively after the US government shutdown put the entire financial system at jeopardy", reports the Wall Street Journal.
German economists' reactions fluctuate between outrage and amusement. FAZ’s economic correspondent in Washington DC, Patrick Welter, argues that "the euro crisis would be much worse if the Germans with their robust exports had not provided an economic anchor for the euro area. Germany must continue to turn a deaf ear to such insinuations from Washington."
WSJ Deutschland's Hans Bentzien writes in the Süddeutsche Zeitung that the Americans are consistently pursuing their own interests. If the competitiveness of the German economy doesn't suit them, then they criticise German economic policies. "The Americans are not motivated by altruism but pursue their national interest", added Commerzbank economist Ralf Solveen.
However in a speech in Berlin, entitled Transitions in an Interconnected World and Germany’s Role, the IMF's First Deputy Managing Director David Lipton backed the US Treasury, urging Merkel’s government to reduce its export surplus to an “appropriate rate” to help its euro area partners cut deficits. A “significantly smaller current account would be useful", Lipton said. Cutting excessive deficits in the euro area “simply can’t happen unless surpluses are down as well".