A nation of surpluses<\/h3>\n
That protracted stagnation in domestic demand helped cause Germany to run up huge and persistent current account surpluses, averaging about 7% of GDP<\/a> since 2006. Germany\u2019s current account surplus, on pace to be the world\u2019s largest for a second year in a row, is significantly bigger than China\u2019s, which has declined sharply<\/a> as a share of GDP from 10% to 2% since the financial crisis.<\/p>\n Meanwhile Germany\u2019s has gone the other way, and its leaders do not see anything wrong with that. Rather, the government views it as evidence of the country\u2019s sound policies and restored competitiveness. Eurozone partners are invited to follow the German lead. They are told to balance their budget, liberalize their labor markets and improve their own competitiveness.<\/p>\n There is something fundamentally wrong about this prescription. It is actually no surprise that the eurozone remains stuck in crisis today, a crisis that is in some respects worse than the experience of the Great Depression of the 1930s. Unless the rest of the world starts booming soon \u2013 and there\u2019s no sign that it will \u2013 the situation in the eurozone is more likely to deteriorate further than improve on its own. Germany would do itself a big favor by finally acknowledging that its own model is not working for the eurozone and change track.<\/p>\n It may be a good starting point to highlight that Germany\u2019s current account surplus was a key factor<\/a> in bringing about the euro crisis in the first place.<\/p>\n Basically, a country that runs a current account surplus earns more than it spends and acquires net claims against the rest of the world. A country that runs a current account deficit spends more than it earns and accumulates net debts against the rest of the world. Prior to the crisis the eurozone as a whole had a nearly balanced external position. But internally the eurozone became severely unbalanced as more than two thirds of Germany\u2019s external surplus was balanced by its own eurozone partners. When Germany followed the very same policies it now prescribes to its euro partners, the predictable consequences were just as those witnessed elsewhere today: at the time, Germany was known as the \u201csick man of the euro.\u201d<\/p>\n But Germany got lucky. As interest rates fell across the eurozone, credit and spending booms were ignited in today\u2019s crisis countries. Their spending fired the German export engine, while German banks were all too happy to refinance loans in Spain and elsewhere. So Spain and the other crisis countries ran up net external debts that reached about 100% of GDP<\/a>. When crisis struck, private lending froze, leaving the currency union divided into debtors and creditors (mainly Germany), and separated by a severe competitiveness imbalance.<\/p>\n This is where Germany\u2019s austerity prescriptions for crisis countries come into play. These countries are lacking the external lifeline \u2013 booming exports \u2013 that rescued Germany a decade ago. Instead, they are sinking ever deeper into what is known as debt deflation, when their attempts to reduce indebtedness actually raises the real burden of the debt. To restore their competitiveness, they have to engineer a lower rate of inflation than Germany\u2019s, so that their goods are cheaper. That\u2019s tough given German inflation is only 0.8%.<\/p>\n And restoring competitiveness by deflation is especially painful. To actually reduce their indebtedness, the countries need to run current account surpluses and grow their GDP. That requires trade partners who are willing to spend \u2013 something that is hard to come by these days.<\/p>\n Certainly Germany is not returning the favor of increased spending that it received during the last decade. Indeed, the German government is adamant about not spending more. The euro crisis has proved too convenient for Germany, providing super-low interest rates and a euro exchange rate that has allowed the country to shift its notorious surpluses elsewhere. But Germany will be the biggest loser if the euro comes apart. Hopefully its leaders will wake up from their austerity-propels-growth dreams before it is too late.![\"Bibow_German](\"http:\/\/multiplier-effect.org\/files\/2014\/10\/Bibow_German-Current-Account.jpg\")
<\/a><\/p>\n\u2018Sick man of the euro\u2019<\/h3>\n
Germany\u2019s painful prescription<\/h3>\n
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