Last week, U.S. Treasury Secretary Jacob Lew heavily criticized Germany's economic performance. In a report to congress, Germany is accused of provoking deflationary distortions in the world economy by relying too much on exports, while its domestic demand was "anaemic."[Hong Kong company registration]
This led to a huge surplus on its current account, balance of an economy's exports over imports of goods and services.
By flooding foreign markets with its own goods and buying much less from other countries, so the criticism goes, Germany would hamper the necessary adjustment of trade flows and GDP growth, not only in the euro area, but in the world economy at large.
This is not the first time that Germany faces such criticism of its business model. Similar charges have been raised in the past by Christine Lagarde, managing director of the International Monetary Fund (IMF).
Likewise, German leaders like Chancellor Angela Merkel or Finance Minister Wolfgang Schaeuble have repeatedly been faced with such allegations in international fora like G8 meetings and other economic summits.
The argument [Set Up Company Hong Kong]of the critics is essentially this: German economic policy is geared unilaterally towards exporting manufactures, boosted by cutting production costs through rationalisation and holding wages down. Low wages would constrain household consumption and domestic demand in Germany.
If wages were higher and firms were to invest more, GDP growth would be driven more by internal demand forces and companies would produce to a larger extent for the home market.
In addition, Germany would import more goods and services from the rest of the world and thus provide stimulus to the sluggish economies of its European neighbours and overseas.
Is this criticism justified? Does Germany conduct a "beggar-my-neighbor" policy of protectionism?
It is true that Germany's external surplus has recently increased to a high of 7 percent of GDP. According to data from the IMF, German surplus amounted to 239 million U.S. dollars in 2012. As a proportion of GDP, Germany recorded a current account surplus of 6.9 percent last year.
This has not always been the case. In the late 1990s and early 2000s, the boom triggered by German reunification led to a bout of cost inflation and pushed the country's current account into deficit. The loss of price competitiveness led to a recession and a rise in unemployment to a record 5 million -- imbalances that were corrected subsequently in a painful process, when the German economy stagnated for several years.
Surplus not resulting from protectionism...[Hong Kong Company Formation]
The revival of Germany's export strength since the late 2000s is mainly due to the restoration of competitiveness through rationalisation and productivity gains by firms investing in new technologies. It is not the result of an undervalued currency (as a member of the euro area, Germany has no control over its exchange rate; moreover, the euro exchange rate has followed an upward trend).
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