The German surplus is creating great tensions in the EU

Germany’s large trade surplus with much of the rest of the EU is doing much harm.

Countries in the Euro in deficit have to borrow from Germany. As countries borrow more from Germany so they become more dependent on the German view. Germany says that she will only lend to other countries in the Euro in return for their acceptance of EU/German discipline over budget deficits, public spending and general economic policy. Germany sees her loans as a way of extending control over the policies of the countries that are borrowing. It results in an EU view of benefits, pensions, general public spending, taxation and deficits becoming official policy in the debtor nations.

In the case of Greece the borrowings have become so big that the country has reneged on its private sector debts and is looking at ways of cutting the amount of interest it has to pay on its borrowing from other EU states and hoping for debt extension or retirement. The Euro area is learning the hard way that if a debtor gets too heavily into debt the creditor may have to forgive some in order to get a bit more of their money back. Bankrupting the debtor nation may not be a good idea for the creditor, and it is certainly bad news in the short term for the debtor. In Cyprus bank depositors had to take a hit when the system was overborrowed.

This conflict between the German view of the need for discipline and the view of many in the debtor countries that they need a different economic approach to lift people out of unemployment and poverty has spawned new parties and political movements to try to shift the German position. So far challenger parties have been able to do well and even take government in Greece, but they have been quite unable to alter EU policy which remains under the strong influence of the German state as bank manager.

Some senior Germans think the UK should join the Euro if we stay in the EU. They see allowing the value of the pound to change as a way of escaping the disciplines of EU/German economic policy which they regret. In the meantime the large UK deficit on balance of payments means that German investors can buy into UK private sector assets and companies, and start to exercise more control over our economy through private sector ownership.

I fully understand the German view that they work hard and manage well to produce a surplus, and they expect others to do likewise. There is nothing wrong with a modest surplus. The problem is when a country runs a persistent and high surplus it means others are running a persistent and high deficit. This can become unsustainable, and is ultimately damaging to the surplus country as well. The first round bad effects are recession or no growth in the customer economies, leading to less business for the main exporter. Second round effects can be reneging on debt, as we have seen with Greece, or nationalising assets acquired as sometimes happens in emerging economies without such a strong rule of property law.