A time bomb for the Euro? Understanding Germany's current account surplus

The paper analyses the rise of the current account balance in Germany by around ten percentage points (relative to GDP) in the period 1999-2016. A big part of the rise is due to subdued domestic final demand which tends to suppress growth of imports. This demand-side effect has to do with weak wage dynamics, unequal income distribution and fiscal restraint. Despite ups and downs, the trend seems to be persistent. On the supply side, the cost and price competitiveness of the German economy is superior in European comparison. However, much more important is the superior non-price competitiveness in various dimensions. Exports grow in line with world exports which tend to grow markedly faster than imports and GDP in Germany. If this wedge between growth rates of imports and exports continues, the current account tends to rise, irrespective of short-term ups and downs. Germany follows an unsustainable trend.On the supply side, it is the strength of German manufacturing, the basis of the country's surplus. It has emerged in parallel with a process of creeping deindustrialisation in other EMU member states. The export championship, seemingly the crown jewel of the economy, has the mirror image of an Achilles heel. The surplus cannot be understood without the dysfunctions of the EMU which has no mechanisms to prevent and correct current account imbalances. Many policy makers are blinded by export success and vested interests of German export industries. They trust in "laisser-faire" and "no activism" advice, in contrast to concerns from the European Commission and the IMF. In this sense, there exists a time-bomb for the cohesion of the Euro area.