Brussels looks warily at German surplus

By Mike Peacock
November 13, 2013

Barring a last minute change of heart, the European Commission will launch an investigation into whether Germany’s giant trade surplus is fuelling economic imbalances, a charge laid squarely by the U.S. Treasury but vehemently rejected by Berlin.

This complaint has long been levelled at Germany (and China) at a G20 level and now within the euro zone too. Italian Prime Minister Enrico Letta urged Berlin this week to do more to boost growth.

Stronger German demand for goods and services elsewhere in the euro zone would surely help recovery gain traction. The counter argument is that in the long-run, only by improving their own competitiveness can the likes of Spain, Italy and France hope to thrive in a globalised economy.

Berlin says it has more than halved its current account surplus with the euro zone as a share of gross domestic product since 2007. But its global current account surplus is the biggest in the world as a percentage of GDP. It totalled 6.9 percent of GDP last year, higher than the 6 percent threshold that the Commission considers excessive.

One thing is sure; German policymakers will be furious at a time when they are still trying to construct a coalition under Angela Merkel.
As we’ve reported in recent days, the signs are that the next government in Berlin is already heading away from further surrenders of sovereignty. If an in-depth review concluded that the surplus is causing imbalances to Germany’s and Europe’s economy and Germany does not take the recommended steps to fix the problem, the final result can be a fine of 0.1 percent of GDP – which would enrage more than hurt.

Ahead of a spray of euro zone Q3 GDP reports on Thursday, the German government’s panel of economic advisers, traditionally knows as the “wise men”, publishes its annual report, including growth, trade, inflation and unemployment forecasts for next year.

The Bank of France has already said the French economy grew just 0.1 percent in the third quarter and there is a measure of disquiet in the euro zone about the lukewarm approach to economic reforms. S&P downgraded its credit rating last week. The OECD will present a report on France’s competitiveness that President Francois Hollande had asked it to produce.

The Bank of England’s quarterly inflation report is always a major set piece and will be parsed for any glimpses of contradiction with the forward guidance that interest rates are unlikely to rise until late 2016.

The Bank says it will only tighten policy when unemployment falls to seven percent or below and it expected that to happen very slowly. The consensus is that the jobless rate will get there in late 2015 or even sooner and that Mark Carney will have to acknowledge that and shift the Bank’s guidance. That could happen today and monthly unemployment data are released just before he speaks.

The Bank is likely to revise up its growth outlook and predict lower unemployment and inflation than three months ago but stress it is in no hurry to tighten policy. For now, Reuters polling produces a median forecast of an April 2015 rise in rates from a record low 0.5 percent. A minority expect a move before the end of next year. On the other hand, inflation fell quite sharply to 2.2 percent last month, taking some of the pressure off to start thinking about tightening policy.

This is an interesting one for the markets. With the Fed having deferred any withdrawal of stimulus and years away from raising rates, and with the ECB cutting rates again, the UK stands out like a sore thumb as the major currency country where policy tightening is starting to hove into view.

Italy is back in the debt market with an auction of up to 5.5 billion euros of 3-year, 30-year and floating rate bonds. The runaway success of its retail bond – which raised 22 billion euros, making it the biggest single bond sale by a European government – has removed any funding pressure.

There’s still plenty of trouble brewing elsewhere however, with political wrangling over the 2014 budget unabated and a final Senate vote on banning Silvio Berlusconi from public office looming large.

Talks between Greece and its international lenders continue in Athens with the EU/IMF/ECB troika demanding measures to fill a 2 billion euros hole it sees in the 2014 budget while the Greek government refuses to come up with further austerity measures and hopes its ability to run a primary surplus will persuade its lenders to cut it some more slack on its bailout loans to make its debt sustainable.

Today, budget data are expected to show higher than expected tax revenues for the first 10 months of the year, which could strengthen Athens’ hand but a senior euro zone official told us last night that the two sides remain at odds over how to close the budget gap and are still “billions of euros apart” with no movement. Greek Finance Minister Yannis Stournaras retorted that the gap was not measured in miles but metres.

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