France attacks hefty German trade surplus

France on Monday accused Germany of trying to boost trade at the expense of Berlin's eurozone partners by squeezing salaries and pushing exports, as Europe seeks to emerge from the global economic crisis.

France attacks hefty German trade surplus
German exports heading out of Hamburg's port. Photo: DPA

French Finance Minister Christine Lagarde called hefty Germany’s trade surpluses unsustainable for its neighbours.

“(Could) those with surpluses do a little something? It takes two to tango,” she told the Financial Times newspaper. “Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs.”

Though Germany recently lost its crown as the world’s leading export nation to China, Europe’s largest economy still has a positive trade balance with most of its immediate neighbours. And eurozone members can no longer devalue their currencies to compensate for Germany’s surplus as they frequently did before the introduction of the euro.

“I’m not sure it is a sustainable model for the long term and for the whole of the group,” she said. “Clearly we need better convergence.”

But Chancellor Angela Merkel’s spokesman on Monday refuted Germany was the problem.

“We are not a country that sets salaries or consumption by decree,” he said. “It is better to think about a growth strategy together rather than obliging some to hold back artificially.”

He underscored the role of Germany’s Mittlestand sector, a vast network

of small- and medium-sized enterprizes, often family owned, that are highly specialised, export oriented and “very innovative and very quick to react.”

“The question is how can others achieve that,” the spokesman said.

Without a federal minimum wage, the German government cannot directly increase disposable income and in the 1990s the country’s trade unions accepted relatively low pay to preserve jobs as aeging German industries restructured operations to keep abreast of others around the world.

Less money to spend, along with high taxes levied to help develop formerly communist eastern Germany and a German tendency towards saving, resulted in an economy that imports much less than it exports.

“It is the relative weakness in imports (and consumption) that has led to the sharp widening of the current account surplus,” Goldman Sachs economist Dirk Schumacher noted, a trend that is not likely to change soon.

A pay deal negotiated by the IG Metall trade union last month for 3.5 million metallurgy workers favoured job security over pay.

Some economists urge the government to cut taxes to encourage consumption, but the government has to deal with a swollen public deficit resulting from stimulus programmes aimed at dragging Germany out of its worst post-war recession.

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Swedish economy to grind to a halt as interest rates kick in

Sweden faces an economic slump next year that will see economic growth grind to a complete stop, Sweden's official government economics forecaster, has warned.

Swedish economy to grind to a halt as interest rates kick in

Sweden’s National Institute of Economic Research, which is tasked with tracking the business cycle for the Swedish government, warned in its quarterly forecast on Wednesday that greater than expected energy prices, interest rate rises, and stubborn inflation rates, Sweden was facing a significant downturn. 

The institute has shaved 1.6 percentage points off its forecast for growth in 2023, leaving the economy at a standstill, contracting -0.1 percent over the year. 

The institute now expects unemployment of 7.7 percent in 2023, up from a forecast of 7.5 percent given when in its last forecast in June.

“We can see that households are already starting to reign in their consumption,” said Ylva Hedén Westerdahl, the institute’s head of forecasting, saying this was happening “a little earlier than we had thought”. 

“We thought this would have happened when electricity bills went up, and interest rates went up a little more,” she continued. 

The bank expects household consumption to contract in 2023, something that she said was “quite unusual” and had not happened since Sweden’s 1990s economic crisis, apart from in the immediate aftermath of the Covid-19 pandemic. 

This was partly down to a five percent reduction in real salaries in Sweden in 2022, taking into account inflation, which the institute expects to be followed by a further two percent fall in real salaries in 2023. 

If the incoming Moderate-led government goes ahead with plans to reimburse consumers for high power prices, however, this would counterbalance the impact of inflation, leaving Swedish households’ purchasing power unchanged. 

The institute said it expected inflation to average 7.7 percent this year and 4.6 percent in 2023, both higher than it had forecast earlier.

Sweden’s Riksbank central bank this month hike its key interest rate by a full percentage point, after inflation hit 9 percent in August, the biggest single hike since the 1990s.