The report to the U.S. Congress " on International Economic and Exchange Rate Policies", said what the vast majority of economists (excluding the Germans ones) is suggesting from several time. Namely, that the German economic policy leads to a deflationary trend in the world. The high German trade surplus has an equivalent effect, in other countries, of a restrictive economic policy. Let alone when Germany and other Nordic allies require all European countries to adopt a restrictive fiscal policy, with the Fiscal compact, the obligation to introduce a (possibly constitutional) law on the balanced budget and so on ...

The official response of the German government was , more or less , as follows: what can we do if our exporting companies are so good? Of course, no one doubts the Germanic technology, product reliability,  precision of delivery, and so on. But this superiority of German companies is only a part of the story. First of all, it should be remembered a simple but fundamental relationship of national economic accounting. The savings of a country are equal to the sum of its investments, the budget deficit and the surplus of the balance of trade. The identity can be expressed in absolute values or as or shares of GDP. With the well-known symbols of macroeconomics :

                                                                   S = I + (G-T) + (X-M)

In the German case, the big trade surplus substitutes the domestic demand, which is compressed. If we consider given the savings component, as relatively more stable than the other components, it is evident that to a greater weight of one of the three components must match a lower weight of the other two . This is what occurred in Germany. If we look at the past six years, that is since this crisis began, in front of a relatively stable, at around 17.5%, of the investments, the phenomenon has been that of a zero deficit and an increase in the trade balance, which also exceeded the limits of 6% set by the procedure in Brussels on macroeconomic imbalances . Simply put, with equal investment and lower deficit, savings funded trade surplus.

But, as pointed out several times by Krugman, Germany didn’t always had a current account surplus . It did during the eighties, and again in the past years . But in the nineties, the current account balance was in deficit. And the reason is very simple: the unification of Germany, which led to a sharp increase in the deficit. We also add the revaluation of the mark (before the euro), against a number of currencies. From euro on, not having to fear more devaluation  by other euro countries, the process towards a balanced budget is the other side of the impressive growth of the German trade balance .

The austerity policies imposed by Berlin and Brussels are inspired by the idea that the whole euro area may become a export-led economy like Germany. But it was not . Neither Italy nor Spain have a manufacturing industry like Germany.It 's true that exports have grown in the two countries, particularly in Spain, where the cost of labour has decreased with the layoffs and wage cuts . But given the limited weight of Italian and Spanish export (around 30%), compared to that of Germany (over 50 %) , the increase in exports does not compensate for the decline in consumption, due to the decreased purchasing power of workers .

Consequently, the fiscal tightening has indeed decreased the deficit , but it has caused a drop in GDP, which in turn has decreased investments, particularly in Spain (-36.9 % , due to the housing bubble) and Italy (-14.6 %, but Italy started from a lower level of one-third to one Spanish). In both countries , even if savings went down (less S due to a lower GDP), a larger share went to finance the improvement of the trade balance .

Frau Merkel probably realizes that a trade surplus of 7% draws the wrath of not only Americans, but also of other European countries. Having to form a coalition government with the SPD, and not wanting to accept eurobonds, mutualisation of sovereign debt or other forms of anti-cyclical transfers, typical of federal systems, Angela will have to accept the measures in terms of minimum wages and the like, resulting in a increase in disposable income. This will benefit other European countries, especially the small ones around Germany (Belgium, Netherlands, etc. ..), but the effect on France, Italy and Spain will be limited (more or less a + 0.15% of GDP). Also because the fiscal compact applies to Germany, which indeed introduced in the Constitution a limit of 0.35% deficit, which is even more  tight (0.5%).

Since Mario Draghi seems determined to follow the expansive line of US Federal Reserve Bank, the fundamental issue concerns precisely the fiscal framework on balancing the budget and reducing the debt. It is clear that these rules condemn other countries to a semi-stagnation. It isn’t true that a balanced budget is a budget neutral. It is if there were no public debt this would be true, and indeed, according to Haavelmo’s theorem, direct spending for services or for public investment would have a more expansive impact. But with a high debt and high interest payments, this is no longer true.

Interest expenditure gives rise to a multiplicative effect very low, close to zero. Therefore, a balanced budget has a deflationary effect on the economy. If the economy were going at a rate too high, you should implement a balanced budget or in surplus, but the situation in which you will find Europe in the coming years is just the opposite of an overgrowth.