German Surpluses: This Time Is Different by Krugman
There’s a tendency, in discussing Germany’s position in world trade, to assume that massive surpluses have always been the German norm — that the country’s high-quality products have always fueled an export engine that inevitably sold much more abroad than Germans bought. But it’s not true. Here’s Germany’s current account balance as a percentage of GDP since 1980:
There was an earlier period of surpluses in the mid-80s, largely the counterpart of America’s Reagan-era deficits. But Germany didn’t run a surplus at all in the 90s. Its big move came with the introduction of the euro, and corresponding huge capital flows to the European periphery.
Along with this move came a sharp decline in German relative labor costs; here’s the OECD number:
Again, the point is that this made sense during the great euro area capital transfer. The problem is that Germany has continued to maintain highly competitive labor costs and run huge surpluses since the bubble burst — and that in a depressed world economy, this makes Germany a significant part of the problem.