Is Germany the “Bad Boy of Europe” Because of Its Refusal to Moderate Is Large Current Account Surpluses?

Is Germany the “bad boy of Europe” because of its refusal to moderate is large current account surpluses?

1. Statement of the Issue

Is Germany the “bad boy of Europe” because of its refusal to moderate is large current account surpluses? Strictly speaking, several European and US policy-makers believe that yes contrary to Germany’s view. The debates on current account surpluses surged when in March 2010, then France’s finance minister, Christine Lagarde encouraged Germany to enhance their domestic consumption in order to reduce the country’s large current account surplus.

Germany’s current account surplus has indeed been large (Figure 1); Germany has displayed current account surplus since 2002, whilst many southern European countries ran current account deficits. In fact Germany’s current account surplus to GDP has been among largest in the world among developed countries in 2010

Figure 1 Balance of Current Account (as share of GDP)

Source: Eurostat

Policy-makers in the US and Europe believe that increased domestic demand in Germany might prompt global recovery. German commentators insist that current account surplus reflects Germany’s competitiveness; while Lagarde emphasizes that it displays threats to European stability and that Germany should do something to promote European growth.

2. Critically annotated literature search

Source 1: Philip Whyte, “Why Christine Lagarde is right about Germany”, Centre for European Reform, March 26, 2010

http://centreforeuropeanreform.blogspot.com/2010/03/why-christine-lagarde-is-right-about.html

Whyte highlights the misconceptions in regards to Germany’s current account surplus. Many analysts in Germany are convinced that large current account surplus evidences German competitiveness. However, it is detrimental to believe that external trade surplus is solely a representation of a healthy economy; indeed Whyte demonstrates that several countries with large current account surplus can hardly be described...