Germany Under Renewed EU Pressure to Lift Domestic Demand

Germany came under renewed pressure from the European Union to boost domestic spending as the EU’s top economy official said higher German demand would help temper the euro’s strength and reiterated a threat to open an in-depth probe of the country’s trade surplus.

The German current-account surplus, at 7 percent of gross domestic product, is the second-highest in the euro area, and EU Economic and Monetary Affairs Commissioner Olli Rehn said an increase in the nation’s domestic demand would bring the balance down and help struggling EU nations boost their exports.

“Crucially, a rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery,” Rehn said in a blog post yesterday. “Removing the bottlenecks to domestic demand would contribute to a reduction in Germany’s external trade surplus.”

As the euro area struggles out of the worst recession in its history, attention has turned to whether Germany’s trade surplus is hampering economic recovery in countries like Greece and France. In recent weeks, both the U.S. Treasury Department and the International Monetary Fund have said a smaller current-account surplus in Germany, Europe’s largest economy, would help its neighbors cut their deficits.

The European Central Bank last week halved its key interest rate to a record-low 0.25 percent in a move that some investors say was intended in part to curb the euro after it soared to the strongest since 2011 against the U.S. dollar. ECB President Mario Draghi said the euro’s strength “didn’t play any role” in the central bank’s decision.

Recent Peak

The euro traded at $1.3407 late yesterday in Brussels, up 0.3 percent on the day and down from a recent peak above $1.38 in late October. The European currency is 5.5 percent higher against the dollar from a year ago.

The European Commission, the EU executive in Brussels, said last week that Germany has exceeded the EU guideline of a 6 percent surplus since 2007 and forecast the nation to remain above that threshold for at least the next two years. Of euro-area countries, only the Netherlands has a larger trade surplus, according to EU figures.

“The increase in domestic demand has doubled in the past two years when compared to the euro zone as a whole, but it is still modest,” Rehn said in yesterday’s blog post. “Because these important issues deserve further analysis, the European Commission will this week need to consider whether to launch an in-depth review of the German economy in the framework of the EU’s Macroeconomic Imbalances Procedure.”

Latest Move

Any investigation into Germany’s trade surplus, which would be announced tomorrow, would be the EU’s latest move under part of its stricter economic-governance rules introduced two years ago and aimed at identifying the emergence of harmful macroeconomic imbalances. The Brussels-based commission will on Nov. 15 issue opinions on the draft budgets of euro-area nations for the first time in a bid to introduce greater fiscal discipline throughout the bloc.

Last week, Rehn called on Germany to take action to boost consumption and foster higher wages. He recommended tax cuts, reductions in social contributions and infrastructure spending to help encourage domestic spending.

The EU can open a review if a country’s current account breaches the 6 percent threshold over three consecutive years.

The commission will not carry out a “simple mechanical reading of these indicators” that would automatically open a review into Germany and will take other economic indicators into account, Simon O’Connor, Rehn’s spokesman, told reporters yesterday in Brussels.

In-Depth Reviews

“We use these indicators as a starting point for any economic reading, an economic analysis if you will, of the situation, and on the basis of that analysis we draw conclusions as to whether in-depth reviews are merited,” O’Connor said.

He said that if an investigation were opened, a report would be issued in the first half of 2014.

Germany’s Economy Ministry said on Oct. 31 that surpluses “are a sign of the competitiveness of the German economy and global demand for quality products from Germany.”