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Why Germany holds the key to Europe's economic revival

Audi cars are pictured at a shipping terminal in the harbour of the German northern town of Bremerhaven on March 8, 2012.


There is no stopping Germany. The euro zone is in recession, yet the country still increased exports for a third consecutive month in March. The trade surplus widened to €17.4-billion from €14.9-billion in February.

Excellent news -- if you're German. For the country's partners in Europe, the latest trade figures are a reminder of how relatively uncompetitive their economies are. Renewed prosperity in places such as Greece and Italy will require a boost in exports. Germany's export-driven economic growth is a barrier to that happening.

The unpleasant conversation the United States and China have carried on for years over trade policy is coming to Europe. Germany is China, the hyper-competitive export machine that sucks up all the demand. The rest of Europe is the U.S., the debt-burdened economy badly in need of generating wealth by means other than consumption.

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Germany's big trade surplus suggests it could be doing more to rebalance economic growth in the euro zone. Authorities say they want to boost domestic demand. The conditions are right: corporate and household balance sheets are healthy, unemployment is relatively low, wages are rising and inflation is tame. German Chancellor Angela Merkel might have inherited the crown of Queen of Austerity, but at home her fiscal policy has been measured. A team from the International Monetary Fund this week called Germany's fiscal consolidation "modest," noting that social programs were being left alone, buoying demand. Imports increased 1.2 per cent in March.

Yet there will be pressure on Germany to do more. As the region's biggest economy, it holds the promise of becoming an important export market for its struggling neighbours. The country's heavy emphasis on factory production and exports has come at the expense of a relatively underdeveloped services industry. The IMF says Germany should boost productivity in services by increasing the level of competition, especially in transportation and energy. Some structural economic reforms of its own would enlarge Germany's economy, fostering an improved quality of life at home and generating demand to help pull the rest of Europe out of the doldrums.

"Germany should seize the opportunity to undertake its own structural reforms to further raise potential growth and diversity its sources," the IMF's mission to Germany said May 8. "Looking ahead, a pickup in wages and some asset prices would be part of the natural process of rebalancing the sources of growth," the IMF also said. "Allowing these developments to proceed, while adhering to Germany's macroeconomic policy framework, will also help to appropriately further reduce Germany's high current account surplus."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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