The ECB’s inaction is not, however, wholly responsible for the appreciation of the euro’s exchange rate. The pattern of current account imbalances across the eurozone also plays a large role.
Germany’s current-account surplus, the largest in the eurozone, is not a new phenomenon. It has existed since the 1980s, falling only during reunification, when intensive construction investment in the former east Germany more than absorbed the country’s savings. The external surplus has grown especially rapidly since the early 2000s, and today it remains close to its pre-crisis 2007 level, at 7.4% of GDP.
Now, however, countries previously stricken with deficits are moving into surplus, which means the eurozone’s current account is increasingly positive. Indeed, the eurozone-wide surplus is now expected to be 2.25% of GDP this year and next. The eurozone is saving more than it is investing, or, equivalently, exporting more than it is importing. This is strengthening its currency.
Back in October 2013, the US Treasury pointed the finger at Germany’s structural surplus as the source of Europe’s woes. Its argument was that if one country runs a surplus, another must run a deficit, because the excess savings/ exports of the surplus country must be absorbed by another country as investment, consumption, or imports.
If the surplus country takes no steps to reduce its surplus – for example, by increasing its domestic investment and consumption – the only way the deficit country can reduce its deficit is by cutting its own investment and consumption. But this would produce a “bad” equilibrium, achieved by stagnation.
Something like this seems to have happened in the eurozone. Germany has retained its “good” surplus, whereas the Mediterranean countries slashed their deficits by cutting investment, consumption, and imports. Greece’s unemployment rate soared to nearly 27%, Spain’s is almost as high, and Portugal faces a banking crisis.
via The Guardian
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