Greek Deficits and German Surpluses – Two Sides of the Same Euro
By Kai Behrens
More than ten years after the introduction of the euro, macroeconomic imbalances
within Europe’s Economic and Monetary Union (EMU) are increasingly becoming a
source of concern for the stability of the Eurozone. Against the expectations of the
euro’s architects, inflation rates between member states have continued to diverge
and current account imbalances have grown to remarkable proportions.
Unfortunately, the bulk of the blame for such imbalances is almost exclusively put
on deficit countries like Greece, Italy, Spain or Portugal. Particularly in Germany, it
is often conveniently forgotten that surpluses are the necessary corollary of deficits.
Mistaking deficit countries as the sole culprits and letting surplus countries like
Germany determine their terms of adjustment is to put the fox in charge of the
henhouse. An automatic sanctioning regime that encourages structural reforms and
punishes both excessive deficits and surpluses could neutralize power imbalances
and avoid the pitfalls of intergovernmental stability pacts.
The global economic and financial crisis that began in 2007 has reminded Europeans of
some of the negative side effects of Germany’s traditional export-oriented economic
growth. In 2008, while other European countries tried to fight recession by stimulating
counter-cyclical domestic demand, German decision-makers, rather than providing
economic and political leadership, seemed willing to remain stubbornly frugal and
undermine a coordinated European effort. Quickly other Europeans began to speculate
that Germany’s inaction might be motivated by a hidden mercantilist agenda. Due to its
weak domestic market and its strong export-dependence, it seemed, Germany was trying
to profit from stimulus packages abroad and put Europe’s recovery at the mercy of
resurgent foreign demand in the U.S. and China.
The atmospheric problems caused by Germany’s export-oriented economy during the
current financial crisis are an indicator of an underlying, potentially dangerous long-term
trend. In a time of increasing global competition, Germany has continued to generate 80
percent of its economic growth through export growth over the past ten years. While
Germany was able to maintain its world export market share in a time of rapidly
increasing global competition, France, Italy and others have suffered strong losses. As a
consequence, current account imbalances among EMU member states have begun to
diverge dramatically. While the German current account has grown from an average
deficit of - 0.8 percent of GDP between 1997 and 2001 to an average surplus of + 4
percent between 2002 and 2008, France and Italy have joined the deficit club after years
of continuous current account surpluses. Today the surpluses of the Federal Republic
balance out deficits in almost all other EMU member states.
As the near-bankruptcy of Greece and the precarious situation of Italy, Spain and
Portugal demonstrate, particularly within a monetary union like the Eurozone, structural
differences between countries can translate into diverging macroeconomic policy
preferences and political conflict. In a system of floating or adjustable exchange rates, if a
This essay appeared in the February 4, 2010, AICGS Advisor. http://www.aicgs.org 1
country is continuously running current account deficits, the transaction demand for the
country’s currency decreases, the currency depreciates and the international
competitiveness of the country’s exporters improves, thus “automatically” correcting the
original current account deficit. Under floating or adjustable exchange rates, moreover,
countries can influence the level of their deficits and the export competitiveness of their
firms by devaluing their currencies. In monetary unions like the Eurozone, the exchange
rate loses its equilibrating function. As long as the overall current account of the EMU
remains in balance, national trade deficits do not result in exchange rate depreciations. In
turn, surplus countries like Germany no longer necessarily have to fear an appreciation of
their currencies and a weakening of their export price competitiveness.
Since EMU member states constitute each other’s most important import and export
markets, deficits and surpluses within the EMU are closely related. The disappearance of
the equilibrating function of the exchange rate among EMU member states can thus
explain the observed centrifugal divergence of current account imbalances. Particularly in
countries like Spain or Portugal where deficits are structural rather than political, current
account deficits are the counterpart of current account surpluses elsewhere in the EMU.
Although deficit and surplus countries share the blame, they do not share the burden of
adjustment. As the example of Greece shows, the costs and benefits that result from the
disappearance of the exchange rate’s equilibrating function are distributed very unevenly.
Whereas international financial markets punish countries with excessive deficit
imbalances by demanding higher interest rates for government debt, surplus countries
like Germany are rewarded for their imbalances with lower interest rates.
Contrary to the expectations of the euro’s architects, differences between structural
surplus and structural deficit countries have been re-enforced by the institutional setup of
Europe’s Economic and Monetary Union. The EMU was designed after German
macroeconomic preferences for low-inflation export-led growth. German fears of a weak
European currency that would undermine the export competitiveness of German
producers culminated in ceilings for inflation rates, budget deficits and government debts
that were codified in the Maastricht criteria and the Stability and Growth Pact. Originally
intended to encourage structural reforms in domestically oriented high-inflation
economies and thereby reduce economic asymmetries within the Eurozone, these
provisions have turned out to exert structural adaptation pressures on both export-
oriented and domestically-oriented economies.
Instead of increasing the overall economic symmetry of the Eurozone, adaptation
pressures have reinforced the export-dependence of countries whose domestic structures
were already well suited for export-led growth and they have proven too strong for
domestically oriented economies. While many precautions were taken to avoid
excessively high inflation rates in EMU member states, none were taken to assure EMU
member states against the effects of excessively low inflation in Germany.
Ironically, the country that suffers most from domestic imbalances underlying current
account imbalances is Germany itself. In today’s more competitive global economy,
This essay appeared in the February 4, 2010, AICGS Advisor. http://www.aicgs.org 2
Germany’s low-inflation export-led growth has turned from a virtue into a vice. Global
market pressures have increased the cost and limited the economic success of export-led
growth. Today, German exporters can only remain price competitive if they outsource
production and complement automation with wage-restraint to reduce unit labor costs.
Over the past ten years, therefore, Germany’s structural dependence on export-led growth
has resulted in real wage stagnation despite robust productivity growth. While this policy
has depressed domestic demand, it has greatly increased the competitiveness of German
exporters and it has bloated current account surpluses. In short, Germany is increasingly
buying its export “success” with continuously high unemployment rates and a reduction
of its population’s overall living standard.
As the economic realities outlined above demonstrate, excessive current account deficits
and surpluses are strongly interconnected and resolving them should be equally important
to surplus and deficit countries. In reality, however, decision-makers in Germany demand
readjustment from deficit countries while at the same time try to further improve
Germany’s export competitiveness. This seemingly irrational behavior can easily be
explained by Germany’s historically grown industrial and institutional structure. The past
success of Germany’s export-oriented growth model has created an almost
insurmountable alliance of powerful employers’ and workers’ associations like the BDI
and the IG Metall with a concrete interest in the continuation of low-inflation export-led
growth. These domestic interests thwart any attempt at a radical “export substituting”
restructuring of the German political economy.
None of the traditional domestic remedies for resolving Germany’s export dilemma seem
practical. Simply trying to strengthen the domestic market by paying higher wages or
lowering taxes would inevitably result in a reduction of international competitiveness and
thus export demand. Instead of compensating for the reduction in export demand,
however, the domestic demand generated by such measures would be directed towards
imports of consumer goods from abroad. Just like a strengthening of domestic demand, a
return to protectionism does not seem useful either. Protectionist barriers would result in
high costs for consumers, they would have to pass the EU’s approval and they would
inevitably result in retaliatory measures from abroad. No European country would thus
suffer more from protectionism than Germany.
In light of the domestic obstacles that present themselves in every country and since
current account imbalances among EMU member states are directly interlinked, it seems
logical to try to use the European level of governance for re-embedding the German
economy in Europe and solving the problems associated with the industrial and
institutional setup of the German economy.
One of the motivations behind the founding of the EU was to guarantee stability and
national self-determination by resolving member states’ economic problems in mutually
beneficial ways. In the past, the EU budget has served to subsidize industries identified as
strategically or culturally important and it has provided infrastructure investments in
economically-backwards parts of Europe. Today, a similar kind of fiscal solidarity might
be needed to solve the problems resulting from Germany’s export-Sonderweg.
This essay appeared in the February 4, 2010, AICGS Advisor. http://www.aicgs.org 3
A conceivable way of reconciling the interests of deficit and surplus countries that would
respect countries’ historically grown domestic structures and democratic traditions would
be an automatic counter-cyclical stabilizer financed by penalties levied on countries with
excessive current account imbalances. On the basis of conditionalities for structural
reform, such a fund could transfer money from domestically oriented economies to
export-oriented economies in times of strong domestic growth and from export-oriented
economies to domestically oriented economies in times of strong export growth.
The non-enforceability of the Stability and Growth Pact is the strongest argument for
reform. An automatic stabilizer would reduce the exposure of national politics to the
lobbying of special interests and thus solve some of the enforcement problems of the
Stability and Growth Pact. Combined with conditionalities for structural reforms,
automaticity would, moreover, greatly increase the incentives for and reduce the costs of
domestic structural readjustments. Since the proposed fund recognizes the interlinked
nature of excessive surpluses and deficits, it would rapidly increase the interest of surplus
countries like Germany in the reduction of domestic surpluses and foreign deficits.
Because such an automatic sanctioning mechanism would help avoid conflicts and
increase the political and economic stability of the Eurozone, it would clearly be in the
best interest of export-oriented and domestically oriented economies alike.
Kai Behrens is a fourth-year PhD student at Johns Hopkins’ Paul H. Nitze School of
Advanced International Studies (SAIS). The working title of his dissertation is
“Destructive Discipline – The German Economy, Fixed Exchange Rate Regimes and the
This essay appeared in the February 4, 2010, AICGS Advisor. http://www.aicgs.org 4