April 20, 2017
The NYT ran a Reuters article which reported on the German government’s response to I.M.F. complaints about its trade surplus. The essence of the response was the German government lacked the competence to reduce its trade surplus, which is currently more than 8.0 percent of GDP ($1.6 trillion in the U.S.). The German trade surplus is of course a deficit for other countries, which are seeing a loss of output and employment as a result.
Because Germany is in the euro, the most important tool for addressing an excessive trade surplus, a rise in the value of the currency, is not available as an option. A higher valued euro would hurt the competitive position of other countries in the euro, like Greece, Portugal, and Spain, that are struggling with slow growth and high unemployment. Of course, a change in the value of the euro does not affect Germany’s position at all relative to its main trading partners within the euro.
The mechanism for an adjustment in this case would be for Germany to increase demand and to try to raise its domestic inflation rate. The best way to increase its budget deficit. Unfortunately, instead of running large budget deficits, Germany is running a budget surplus of 0.6 percent of GDP ($115 billion annually in the United States).
If Germany continues to run large trade surplus, then heavily indebted countries like Greece will inevitably need further debt relief. In effect, this means that Germany will have given away its exports in prior years. If Germany were prepared to run more expansionary fiscal policy and allow its inflation rate to rise somewhat then it could have more balanced trade, meaning that it would be getting something in exchange for its exports.
However, Germany’s political leaders would apparently prefer to give things away to its trading partners in order to feel virtuous about balanced budgets and low inflation. The price for this “virtue” in much of the rest of the euro zone is slow growth, stagnating wages, and mass unemployment.
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