Nova workboard

a blog from young economists at Nova SBE

The Problem of German Surplus

Today I will write about the German Surplus that is a “hot” topic of current debate. Since the beginning of EU, countries have a lot of asymmetries between it. Due to the crisis of 2008, the periphery countries of Europe follow a path of austerity. However, German maintains surplus in its trade balance, due to the fact that importations were reduced. Thus, we have a surplus in current account. Many people argue that this surplus in German translates as a deficit in current account of periphery countries (like Portugal, Greece and Spain). Thus, these countries are more pressured and need to apply more aggressive measures in order to correct the deficit. The first point that I want to clarify, is that the argument before can be a fallacy.  In other words, the German surplus can be “exported” for other country outside the euro area. For instance, imagine that all countries in euro area have a positive surplus in their current accounts. As consequence, at least other country outside euro area will have a negative current account, like USA for instance. Thus, the argument of the negative current account countries like Portugal or Greece is fault of German is a not necessary valid argument as we have seen before. In this sense is natural that the US treasury criticize the surplus of Germany because they are one of the countries that will gain if the surplus is reduced.

Nevertheless, it is important, in a first analysis, to understand what is behind this surplus. According Mr. Olli Rehn, European commissary of economic and monetary issues, we can evoke three main reasons/aspects: (i) “the creation of the euro prevented the German exchange rate from appreciating to reflect the large surplus” (this is a point where the majority of economists agree); (ii) “the integration of the production chains with central and eastern Europe allowed Germany to diversify the labour force” and German can have access to more cheaper labour force in euro area; (iii) “financial market integration and interest rate convergence drove international capital flows which mirrored these current account developments”.[1] These tree reasons are the ones that justify the surplus. However, it is also true that if Germany reduces his surplus, it is not good only for the US, but also for countries like Portugal and Greece. So, should euro area enforce German to reduce his surplus?

One argument in favour is that if Germany increases wages or the investment in order to increase the consumption, the amount of imports increase. However, if the State increases wages (or reduces taxes) this means that people will spend more or will save more? Well, it depends! We do not know for sure and both scenarios can occur. But suppose that people want to consume more imported goods. They can consume more Chinese goods than Portuguese goods, for instance. Nobody knows.

On the other hand we can look to the current account of Germany and verify that current account decreases but still has a surplus.

Pedro Luís Silva                                                         Alexandre Silva

Research Master in Economics, #87               Ms in Economics, #630

[1] From the article “Turning Germany´s Surplus into a win-win for the Eurozone, 11/11/2013, Olli Rehn,


Author: studentnovasbe

Master student in Nova Sbe

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