Why Germany’s trade surplus is bad for the eurozone

In October 2013, the US Treasury argued that Germany’s current account surplus – now around 7 per cent of GDP – imposes “a deflationary bias for the eurozone as well as for the world economy.” In response, the European Commission promised to review Germany’s surplus under its ‘excessive imbalance procedure’. Many German politicians and business people quickly dismissed these interventions, claiming that the surplus is mostly with the rest of the world, not the eurozone, and so does not affect the periphery; that the surplus reflects the country’s competitiveness; and that deflation in the eurozone periphery is positive as it indicates that these economies (and hence the currency union as a whole) are becoming more competitive. They are wrong on all three counts.