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Bundesbank Says Deficit Countries Are Source of Danger for EMU

July 19 (Bloomberg) -- Germany’s Bundesbank said euro-area countries with high current-account deficits are a “source of danger” for the single-currency region.

Since 1999, Greece, Portugal, Ireland and Spain have run up “persistently high” current-account deficits, the Bundesbank said in its monthly bulletin published today. “These macro-economically erroneous trends don’t only cause an increased economic and financial vulnerability of the respective countries,” but also are “a source of danger for other member countries and the currency region as a whole.”

Greece’s near-default triggered a 750 billion-euro ($971 billion) aid package from European Union countries and the International Monetary Fund in May. The European Central Bank began buying government bonds to ease the sovereign-debt crisis and governments were forced to step up budget-spending cuts to reduce deficits, threatening to damp demand and hurt the region’s economic recovery.

Deficit countries “burden the implementation of a stability-oriented, single monetary policy significantly,” the Bundesbank said. “Therefore, it is urgently necessary to correct maldevelopments and avoid a repetition in the future.”

The Bundesbank said the current-account deficits are due to increases in internal demand, “comparatively” strong inflation and a “grave” erosion of competitiveness.

“The respective economies have no choice but to reduce domestic demand to a sustainable level,” the Frankfurt-based central bank said. “A decisive fiscal consolidation is of central importance in light of dramatically deteriorating public budgets.”

In addition, current-account deficits can only be reduced by the countries in question. Even if Germany increased imports by 10 percent, that would largely boost exports of countries that already have current-account surpluses, the Bundesbank said.

The current account balances in Spain, Portugal and Greece would only improve by 0.25 percentage point and by 1 percentage point in Ireland, it said.

To contact the reporter son this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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