Germany may raise spending to reduce imbalances

Subject

Germany’s chronic trade surplus.

Significance

Germany’s trade surplus rose to 14.7% of GDP in May, Eurostat estimates released on July 14 show -- by far the highest in the EU. Reducing the negative effects of this and related imbalances poses a challenge for the governance of both the euro-area and the global political economy.

Impacts

• Increased German investment would demonstrate goodwill and help revive the French-German axis.
• Refusal to address the issue could damage Germany’s credibility in the EU and worldwide.
• Despite some spending increases, a balanced budget may remain a priority -- especially for a CDU-led government.
• Germany runs a surplus on both its US goods and services trade; the only major economy to do so -- leaving it vulnerable to protectionism.