Northern Europe’s Drag on the World Economy

MADRID – In recent years, China’s current-account surpluses – which have averaged almost $220 billion annually since 2000 – have attracted much criticism from the rest of the world. But Germany’s similar-size surpluses – which have averaged about $170 billion since the euro’s introduction in 1999 – have, until recently, largely escaped scrutiny.

The difference, it was argued, was monetary union. So long as the eurozone as a whole was relatively balanced, Germany’s surpluses were considered irrelevant – just as, say, Texas’s surpluses have never been considered an issue in the United States. Chinese surpluses, by contrast, were seen as a cause of global imbalances.

This argument is correct in the sense that it is the current-account surplus or deficit of a monetary union as a whole that can be expected to have exchange-rate implications. And, unlike China, Germany no longer has a “national” exchange rate that can adjust in response to its current-account surplus. These factors – together with the lack of trade data for regions within countries – have led economists only rarely to consider countries’ internal surpluses or deficits.

But, in net terms, a region within a country – or, like Germany, a country or sub-region within a monetary union – still “subtracts” from national and global aggregate demand if it exports more than it imports. Witness how expenditure cuts by US state governments – many of which are constitutionally required to balance their budgets – frustrated, to some degree, America’s massive federal-government stimulus in 2010-2011.