The European Union works out very well for Germany economically, in contrast to many of their neighbours.
For the third year in a row, Germany will have the world’s largest current account surplus.
The key driver of this surplus is their massive trade surplus, which will bring their current account surplus to an estimated $299 billion (USD) in 2018.
Second is Japan, with an estimated current account surplus of $200 billion.
As noted by Reuters, It’s a far different story in the US, where Donald Trump has been trying to close the massive gap the US has when it comes to trade with the rest of the world:
‘”On the other end of the spectrum, the United States is set to remain the country with the largest current account deficit with roughly 420 billion euros,” Ifo economist Christian Grimme said.”
A key driver of Germany’s massive current account surplus is the common currency of the European Union.
By keeping domestic demand low, and focusing on exports, Germany has built themselves into an export powerhouse, and their productivity exceeds many of their southern European neighbours.
However, if there wasn’t a common European currency, the products produced by southern Europe would be far less expensive, in large part due to lower relative labour costs and lower production costs that would come with cheaper currencies in the less productive countries. That would make other countries in Europe more competitive, which would lead to lower prices for German products, and/or more consumption of foreign products by German consumers.
The Euro stops that from happening, so Germany benefits both from a currency that keeps their products at a lower relative cost (compared to their neighbours if the Euro didn’t exist), while also keeping their productivity advantages intact. The consequence for many southern European countries is that they fall further and further into debt, while becoming more and more economically dependent on German imports.
And while Germany often criticizes the lack of fiscal discipline in the rest of Europe, the fact is that Germany needs other countries to run massive current account deficits in order to keep their own exports strong. After all, if nobody had a current account deficit, Germany couldn’t have a current account surplus.
So, while Germany certainly deserves some credit for their economic strength, the Euro provides them with a further advantage, to the detriment of their neighbours.
The Euro also makes Germany more competitive versus the United States and other nations, by giving Germany a large ‘free trade’ zone in which to sell their products – a zone that puts up tariffs on US and other countries’ products.
This is one of the subtle, but key factors behind the growing opposition to the European Union (and Germany’s political/economic dominance of it) in much of Europe.
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