Commission deepens criticism on German economic policies

Yesterday, the European Commission, on the occasion of the presentation of its reports on the ‘European Semester 2014’, the “Annual Growth Survey’ and the ‘Third Alert Mechanism Report’ on macroeconomic imbalances in EU member states, seized the opportunity to deepen and elaborate on its criticism, directed against the economic policies applied by Germany. Also yesterday, Peter Praet, the chief economist of the European Central Bank, in an interview to WSJ when commenting on Bundesbank boss Jens Weidmann’s negative vote last week over the reduction of ECB’s interest rates, meaningfully said “the Governing Council has been able to decide. That’s really the message.” No more German veto This comment by half the Belgian-half German Praet, also a member of the Executive Board of the ECB, obviously means that the times of the German ‘veto’ in Eurozone’s central bank are over. After that European Sting’s title, last Monday, “Berlin cannot dictate anymore the terms for the enactment of the European Banking Union”, is completely justified. Let’s take one thing at a time. A powerful team from the European Commission comprising President Manuel Barroso, Vice-President Ollie Rehn and Commissioner László Andor in charge of employment and social Affairs presented the fourth “European Semester” of economic policy coordination. This is the main instrument the new ‘economic governance’ legislation has bestowed on the Commission. For the first time, the Commission will assess the draft budgets for 2014 of all euro area member states before the budgets are adopted by national parliaments and will present an overview of the fiscal stance in the euro area as a whole. The results of this assessment will be published in detail on 15 November. The Alert Mechanism Report (AMR) is the starting point of the yearly cycle of the Macroeconomic Imbalance Procedure (MIP), which aims at identifying and addressing imbalances that hinder the smooth functioning of the EU economies and may jeopardise the proper functioning of the Economic and Monetary Union. Of course, the three representatives of the European Commission went through the deficiencies in many Eurozone member states. What was new however is related to the super trade and fiscal surpluses of Germany. Berlin under pressure For many months now the EU’s executive arm has been criticising Germany over its excessive incomes and fiscal austerity. By keeping wages and public expenditure frozen for five years, this country has managed to produce huge positive trade balances and fiscal exercises. Of course, those trade balances are realised at the expenses of the rest of Eurozone. Brussels insist that Germany should relax its austere incomes policies so, by boosting internal demand, its trade partners will find the opportunity for more exports. This time however the Brussels criticism goes a bit further. In the context of the Alert Mechanism Report the Commission directly poses this question: “In the case of some countries like Germany the report refers inter alia to the high current account surplus. Isn’t a current account surplus a good thing?” The answer given is that “In general the risks are higher for current account deficits than for current account surpluses…But this does not mean that surpluses cannot be the result of inefficiencies or constitute an imbalance, especially when they are large…The asymmetry in the scoreboard reflects the fact that the risks related to deficits are higher, as the threshold is 4% of GDP for current account deficits and 6% of GDP for surpluses”. Less surpluses The next question posed is how large are the surpluses of Germany? The Commission found that the three-year average of the current account balance is +6.5% and therefore above the indicative threshold of 6%. Latest data, together with the Commission’s Autumn Forecast, suggest an annual surplus of Germany in 2013 at the same level as in 2012: 7% of GDP. This means that this country exceeds by at least 1% of GDP the allowed surplus. It goes without saying that the Commission doesn’t suggest that Germany should reduce its exports. On the contrary, this country’s surpluses are a solid base for the Eurozone as a whole. There are other means however that Germany can help others by helping itself. To this effect, the Commission underlined that “the Council of Ministers recommended to Germany to sustain conditions that enable wage growth to support domestic demand, for example by reducing high taxes and social security contributions, especially for low-wage earners. Moreover, it was recommended that Germany takes measures to further stimulate competition in the services sectors including construction”. Only some weeks ago the European Sting writer Elias Lacon on October 23, while commenting on IMF’s and Commission’s reports on the German economy noted that “Both reports had references to Germany’s over stretched fiscal consolidation (meaning unneeded austerity) and the need to increase wages and reduce taxation on labour, all that in order to better serve the country’s and Eurozone’s efforts for growth”. Hopefully, the next grand-coalition government involving Angela Merkel’s CDU and SPD socialists would relax the fiscal and incomes austerity in this country thus helping itself and the rest of Eurozone.