Brussels, 11/04/2014 (Agence Europe) - Research by five economists commissioned by the European Commission concludes that the German trade deficit has little impact on the eurozone economy.
The research by economists Kollmann, Ratto, Roeger, in't Veld and Vogel applies the DSGE economic model to three areas (Germany, the rest of Europe and the rest of the world), using quarterly data for the period from the Q1 of 1995 to Q2 of 2013 inclusive. It focuses on the following series of “shocks'”that had a potential impact on the German current account surplus: a) the convergence of interest rates in the eurozone towards the German rate in the years leading up to the creation of the euro; b) strong growth of emerging economies over the past two decades; c) relocation of German companies to countries in central Europe with low labour costs and the liberalisation of the German labour market in 2002-2005; d) low domestic consumption and high savings in Germany; e) budget consolidation after the 2008 global financial crisis.
The five economists say that, all in all, the shocks stimulated the real economy in Germany and fed the German current accounts, having only a minor impact on the real economy and inflation in the rest of the eurozone. In other words, they say, real activity in the eurozone has been largely supported by domestic factors rather than the economic situation in Germany.
At the end of 2013, the European Commission analysed the situation in the rest of the eurozone in detail (see EUROPE 10962). It says that the existence of a macroeconomic imbalance is more due to low domestic demand in Germany than the high trade balance (see EUROPE 11032).
The study makes suggestions about future trends in the German trade surplus. The five economists say that increases in the differential between interest rates for government bonds Germany and those in the rest of the eurozone zone euro suggest a gradual reduction is taking place in Germany's trade surplus. Moreover, the pay rises introduced by the new German coalition government should counter-balance the impact of the labour market reforms under the Schröder government. Finally, the experts argue that the healthy German budget provides additional room for manoeuvre for stimulating domestic demand by investing in infrastructure. (MB)