Last year, it was Germany’s intransigent position on a tough fiscal austerity regime for southern Europe’s ravaged economies (Greece, Spain, Italy, to name a few) that brought it under the critical eye of the world.

Now, it is Germany’s own economic policies — its widening trade surplus, which has been over 6 per cent for the last six years, and impact on the wider Euro Zone that are coming under the schadenfreude- tinged spotlight.

It all kicked off last month, when a report by the US Treasury Department lambasted Germany’s high current account surplus, now larger than China’s, its reliance on exports and its “anaemic” domestic demand.

These factors together hampered a rebalancing of the economy at a time much of the rest of Europe was under “severe pressure” and led to a “deflationary bias for the euro area as well as for the world economy.”

unpopular steps in order

The German government was swift with an indignant response rejecting the charges, but that hasn’t stopped a number of other voices adding to the calls for Germany to consider measures to rebalance.

Among those to join in is the government’s own Council of Economic Experts which, in a report published earlier this month, warned the government against shying away from unpopular measures while demanding “painful adjustment processes” from other countries, and that the country’s healthy economic situation was in danger of making politicians blind to the country’s numerous future challenges.

Most significantly, Germany is now under investigation by the European Commission, thanks to a system introduced two years ago to catch potential macro-economic imbalances in member states that could pose a threat to the wider region.

While acknowledging that risks were higher for current account deficits than surpluses, the Commission noted that Germany, with a current account surplus averaging 6.5 per cent for the past three years, and set to reach 7 per cent for 2013, would be given close analysis, examining whether domestic policies could be used more effectively to boost weak domestic demand and private sector investment.

“This exercise by no means aims at restraining Germany’s competitiveness or export performance,” it insisted.

That many in Germany have taken the scrutiny as a signal of envy by some — and a wish to constrain its competitiveness — is perhaps understandable.

After all, without Germany’s strong position, the Euro Zone would not have been able to mount the bailout of its troubled nations to the extent it had. (The much criticised IMF-EU programme is already yielding results with Ireland set to exit, without a credit line, before the year end).

“There is a vicious circle — the imbalances in Europe are certainly one reason behind the crisis but you couldn’t fight the crisis without Germany contributing,” says Carsten Nickel of Teneo Intelligence.

And as Henrik Muller, a professor of economic policy journalism at the University of Dortmund, pointed out in a recent blog posting, since the 19th century, Germany had viewed the international competitiveness of its industry as a matter of “gauge of collective self esteem.”

“Criticising external surpluses means criticising a foundation of a nation,” he argues.

Limited options

National pique aside, there’s the question of whether anything could be done about the supposed imbalance — something which many concur there is no easy answer to. For one thing, argues Christian Schulz of Berenberg Bank, the weakness of German domestic demand is largely a “myth”.

Thanks to strong employment, consumption has risen steadily in the past few years — up 8 per cent compared with 2005 levels according to Berenberg data, with only a couple of blips, at the height of the Lehman Bros crisis, and then when the Euro Zone crisis escalated in 2011.

Of course, it cannot be denied that the behaviour of German consumers is a world away from that of the Anglo-Saxon world. Germany has one of the highest rates of saving in Europe.

Still it is questionable that anything could be done to change the situation: for example, coalition talks between Chancellor Angela Merkel’s CDU and the left-leaning SPD have focused on the introduction of a national minimum wage of 8.50 euros an hour.

While this would raise the income of the lowest families, it will do little to impact the core spenders — the middle class involved in Germany’s high-value manufacturing sector.

While German wages are far more competitive than most of Europe, changing this would prove nigh on impossible, given the way wages are set — in councils between business leaders and unions, where deals have typically been struck offering job security in return for wage growth moderation.

“Unions in Germany are very different to the rest of Europe, they tend to be very conservative…and ultimately choose realistic deals and long-term job security over short-term increases in pay,” says Nickel.

Options that the government does hold, such as infrastructure investment, are unlikely to make a drastic difference to domestic investment. “It’s never going to be above 0.2 per cent of GDP, which is hardly going to move the needle,” says Schulz.

However, he argues that the cause for concern over the impact of Germany’s surplus on the Euro Zone is overstated: “if you break down the surplus between the Euro Zone and the rest of the world, you will see that the German trade surplus with the Euro Zone has declined massively since 2005 — from 5 per cent to less than 2 per cent of GDP,” says Schulz. “It’s with the rest of the world that it has increased massively.” Which, of course, helps explain the criticism from across the Atlantic.

While Germany could theoretically face a fine of up to 0.1 per cent of GDP over the perceived macro-economic imbalance, the European Commission has indicated that is unlikely — so the pressure on Germany is likely to be limited -- fortunate, given that it is a situation it will struggle to solve.

However, argues Nickel, transfers from Germany to fiscally less stable parts of Europe may be a more realistic option. That may not be too palatable to German consumers.

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