The German surplus is creating great tensions in the EU

Germany’s large trade surplus with much of the rest of the EU is doing much harm.

Countries in the Euro in deficit have to borrow from Germany. As countries borrow more from Germany so they become more dependent on the German view. Germany says that she will only lend to other countries in the Euro in return for their acceptance of EU/German discipline over budget deficits, public spending and general economic policy. Germany sees her loans as a way of extending control over the policies of the countries that are borrowing. It results in an EU view of benefits, pensions, general public spending, taxation and deficits becoming official policy in the debtor nations.

In the case of Greece the borrowings have become so big that the country has reneged on its private sector debts and is looking at ways of cutting the amount of interest it has to pay on its borrowing from other EU states and hoping for debt extension or retirement. The Euro area is learning the hard way that if a debtor gets too heavily into debt the creditor may have to forgive some in order to get a bit more of their money back. Bankrupting the debtor nation may not be a good idea for the creditor, and it is certainly bad news in the short term for the debtor. In Cyprus bank depositors had to take a hit when the system was overborrowed.

This conflict between the German view of the need for discipline and the view of many in the debtor countries that they need a different economic approach to lift people out of unemployment and poverty has spawned new parties and political movements to try to shift the German position. So far challenger parties have been able to do well and even take government in Greece, but they have been quite unable to alter EU policy which remains under the strong influence of the German state as bank manager.

Some senior Germans think the UK should join the Euro if we stay in the EU. They see allowing the value of the pound to change as a way of escaping the disciplines of EU/German economic policy which they regret. In the meantime the large UK deficit on balance of payments means that German investors can buy into UK private sector assets and companies, and start to exercise more control over our economy through private sector ownership.

I fully understand the German view that they work hard and manage well to produce a surplus, and they expect others to do likewise. There is nothing wrong with a modest surplus. The problem is when a country runs a persistent and high surplus it means others are running a persistent and high deficit. This can become unsustainable, and is ultimately damaging to the surplus country as well. The first round bad effects are recession or no growth in the customer economies, leading to less business for the main exporter. Second round effects can be reneging on debt, as we have seen with Greece, or nationalising assets acquired as sometimes happens in emerging economies without such a strong rule of property law.


    April 4, 2016

    Germany has a strange and contradictory State philosophy. Whilst not necessarily boasting to the world of its political and social discipline, it advocates and encourages immigration into its domain all those who are from countries where their populations are not coming up with the goods.

    It is as if a long-standing family owned firm called Schmitt Enterprises with an ethos which has only come about because of the very nature of the Schmitts’ family, achieves massive success but then remarkably encourages the family owned firm called Tsipras-Varoufakis-Failuredopulous Inc, which has historically done very poorly for the past 15o years to send its best and worst workers to add to the value of Schmitt Enterprises….on an ongoing basis.

    Despite an initial flurry of growth in productiveness for novelty sake and until expectations of the new workers rise, Schmitt Enterprises will increasingly change in many ways taking on at least some characteristics of Tsipras-Varoufakis-Failuredopulous Inc.

    etc ed

  2. Mark B
    April 4, 2016

    Good morning.

    As I said here before, leaving the EU will allow the Eurozone countries to move to a more federalized system of government and allow for bank transfers to other poorer parts. This would alleviate much unnecessary suffering.

    As we also have a similar situation now with Scotland (ie they too can borrow on the world markets), does that mean England will have to pick up the tab ?

    Reply Of course in our union if Scottish tax revenues fall and benefit costs increase the Union budget assists.

    1. formula57
      April 4, 2016

      And of course had our Union been dissolved a few days ago (as a “Yes” vote in the Scottish referendum would have ensured) then the English, Welsh and Northern Irish would be very much better off, not having to make up for the fall to neglible amounts of oil tax revenue and no longer having to fund benefits they do not enjoy themselves in the form of free prescriptions, tuition and care homes for the elderly.

      (There would likely have been a net decrease in EU referendum voters for “Stay” too! Such a great opportunity squandered.)

  3. Jack
    April 4, 2016

    For some reason the Germans like having an undervalued currency, and even back in the Deutsch-mark days they used to weaken their currency purposefully to boost net exports. If they’re happy being the world’s slaves, then so be it. But forcing countries like Greece to emulate them when the basic accounting facts make it impossible, and then punishing them with ever more austerity, is proof we need a Grexit as well as a Brexit.

    Also, if the recent Euro portfolio selling begins to slow down, and it looks like this is the case, then the Euro is going to appreciate and cut into the Eurozone’s trade surplus. This is going to be bad for Germany’s economy but even worse for the periphery countries, since recently the only thing keeping them slugging along is a modest “improvement” in their current account.

    1. acorn
      April 4, 2016

      According to Mish, deposits are still shifting to Germany from Club Med. This shows up on the ECB Target2 balance sheet. Target2 is a €2 trillion a day clearing system for Eurosystem members. If you think your Euro Bank is dodgy, and all your companies cash is in it, who ya gonna call?

      Deposits in banks become part of the banks capital (banks don’t lend deposits), loss of deposits means loss of capital reserves against bad loans. The ECB as the currency issuer can bail-out any Eurozone Bank with LTROs etc; but, will the Germans let it???

    2. james
      April 4, 2016

      actually, some countries such as spain are now enjoying record goods and services exports, achieved by cutting wage costs and focussing on growing export markets. long term, spain should stay in the euro and become more competitive, as well as reforming its labour market more. short term, it will mean some emigration by younger people continuing

  4. Richard1
    April 4, 2016

    You are right that debtor countries in the eurozone are forced to live under constraints imposed by creditor countries – hardly surprising, there is no appetite in Germany (or Austria, Luxembourg, the Netherlands etc) to make the large fiscal transfer which are the only alternative. As you have explained so well before, this is the central dilemma of any currency zone such as the euro.

    But I find your implied message rather surprising – that the EU (helps Germany ed – not what I said at all. I explained how it harmed all sides in the EU).) You even imply a German government-corporate nexus with German investors seeking to buy UK assets so as to take more control of our economy!

    The U.K. Is an open economy in which foreign investment from Germany and elsewhere is welcome. (U.K. Investors are also free to invest in German assets.)

    Has the Leave campaign decided to play the nationalist-protectionist card? I don’t think it will prove a winner.

    Reply NO there is no such intent. You are very prickly about balanced analysis of what Germany wants and fears in the EU, and what the debtor countries want and fear.

    1. Richard1
      April 4, 2016

      Reply to reply: I just don’t agree with the view – which you do hear – that there is a German agenda to take control of Europe through the EU. I think it’s more the opposite – so horrified and ashamed are civilised Germans at their C20th history that they would rather subsume their national identity into ‘Europe’. On the other hand – as you often point out – they want to have their cake and eat it, by having a political and currency union, but no material fiscal transfers.

      Also, I greatly prefer free, open market arguments for leaving, than quasi-protectionist ones, such as those we now hear in relation to the stock exchange!

  5. Ex-expat Colin
    April 4, 2016

    (words left out ed)

    Whats safe about any of this? And according to BBC R4 Today they are attempting to finish us of with Ammonia in the air…the agricultural version?

  6. Antisthenes
    April 4, 2016

    The whole idea of the EU is to help it’s members become better off by collectively aiding each other to address any problems that they may have. To create an environment that would allow them to become more prosperous. In fact all the EU is doing is adding to those problems problems they would not have had if the EU had never come into existence in the first place.

    As for prosperity in that it has succeeded but not for the majority in fact many are worse off. Germany as you point out has been the only real winner. What Germany could not do through war it is succeeding to do through trade. Dominate Europe. Not this time by malicious intent but as an unintended consequence of the EU and the euro. Well it is time to withdraw from the EU before we are engulfed as well by the unstoppable tide of German hegemony.

  7. Lifelogic
    April 4, 2016

    As you say:- So far challenger parties have been able to do well and even take government in Greece, but they have been quite unable to alter EU policy which remains under the strong influence of the German state as bank manager.

    Democracy is clearly dead or dying in these countries, there is no real democracy or even a sensible demos at EU level.

    There are indeed dangers for Germany too in running this surplus and its banking positions.

    1. Lifelogic
      April 4, 2016

      The UK’s record trade deficit, that Osborne and this governments has done so much to engineer, is indeed a big, big problem. It will however be far easier to address this post Brexit. Particularly as Cameron and Osborne (with their EUphile, tax, borrow, over regulate, endless waste and expensive energy policies) will then have to go.

      But who is there in the Tory party capable, sensible (and can hold the party together) who could replace them? I suppose the odds are that we will end up with Boris, but who will replace Osborne? Almost anyone would surely be an improvement. Is Lawson too old to come back? He seems rather wiser now than he was when he did it last time. Lower simpler taxes, cheap energy, deregulation, easy hire and fire and a far smaller government is the only way to become competitive in the World again.

    2. Lifelogic
      April 4, 2016

      As Roger Bootle says:

      We are contributing to the EU about £10bn net per annum and spending on foreign aid another £12bn. Between them, these two account for almost a quarter of our current account deficit.

      1. stred
        April 4, 2016

        Roger Bootle and JR say the figure is 10bn net to EU (and rising). The BBC News facts give lower figures, down to almost half in the case of the NAO.

        How do they differ and how are my Remainer offspring going to believe the higher figures. Please clarify. ( personally I regard BBC figure as paid EU lies)

        Reply I think the biggest difference is they deduct from our net contribution money spent on overseas aid through the EU budget, claiming the UK would need to spend that on overseas aid from the home budget if we left.

        1. stred
          April 4, 2016

          The question then is would we have to add the money we send to the EU for aid or not, if we still borrow 19bn to send as aid? Do Bootle’s figures for EU and aid take this into account?

          Reply We save £10 bn on net contributions and £12bn on balance of payments. There is no need then to spend some of this on overseas aid. That would be a decision for the UK Parliament.

        2. stred
          April 4, 2016

          From DFID website Development Assistance as Proportion of GNI. P7 box1. EU ODA was 816m then up to £963m.-nowhere near enough to
          reduce 10bn to 5.8.

          Also interesting in spending list. Food and Rural-£5.7m, Health £11m, CDC (the private company which buys equities and businesses ‘which would struggle to attract investment’ £42m, DECC- windmills and solar panels £192m!

    3. Lifelogic
      April 4, 2016

      The UK is powerless to help Port Talbot say Boris in the Telegraph.

      Alas Cameron, Osborne and the rest of the remain side clearly want it to remain powerless and no longer a democracy.

      Still, not very long before these two Ted Heath/John Major like socialist characters have to go. Taking their absurd market interventions and bonkers strategy (of over taxation and over regulation of everything) with them.–their-country-is-powerless-to-help/

  8. JoeSoap
    April 4, 2016

    The answer should be of course for those surpluses to be used to invest in the debtor countries’ industry, infrastructure etc. Siemens, Bosch factories in Greece for example, along the lines of BMW’s Mini factory here. This would have helped to restore the balance and at least have developed an employer-employee relationship rather than a creditor-debtor one.
    However the Teutonic business head had enough business sense to overrule the political heart, so this never happened, and therein lies the fault line in this scheme.

    1. james
      April 4, 2016

      except spain for example has had massive investment in its SEAT and Opel car factories. now the 3rd biggest producer of cars in europe behind germany and france

  9. alan jutson
    April 4, 2016

    Perhaps if we sold off George Osbourne in exchange for a German Chancellor we would not be in debt in the first place.

    Seems a very simple solution to me, as it would teach our Government a financial management lesson, which would perhaps filter down to others who think money just grows on trees or the printing press, and who want to borrow and live beyond their means for ever at someone else’s expense.

    1. Antisthenes
      April 4, 2016

      Having a chancellor that mirrored what a German one would do would not work. We have a different mind set and we do not have the discipline of the German people. That is true of all the members of the EU we are not uniform in the way we think and act so a one fit all solution is bound to fail for all but a few. Nobody thought of this when the the EU and the euro were born and that is why both are proving to be a failure.

      It worked for the USA because it was a coming together of of like minded people. I am not so sure that is true today because the large influx of people into that country that do not share the same values and cultures. We have the same problem here in the UK as we have a large immigrant population that is making consensus much harder to reach.

      Likewise the rest of the EU and becoming worse as we know. So we have a double whammy here union with states who we are not compatible with and immigrants who we are not compatible with either. We are stuck with the latter but we are not stuck with the former we can leave the EU who are making latter worse. So in one fell swoop one major problem solved allowing us to concentrate on solving the other.

    2. Denis Cooper
      April 4, 2016

      To be fair on that Osborne did inherit an awful mess.

      1. alan jutson
        April 4, 2016


        “…an awfulness…”

        Agreed, but we have not made much headway in 6 years have we.

        Still throwing money down the drain, still not even halved the deficit, debt doubled, and a whole host of tax rises.

        Only good things.

        Personal tax allowance increased, Fuel duty frozen, and Pension freedom introduced.

        1. Lifelogic
          April 4, 2016

          He did indeed inherit an awful mess, but he has made it far, far worse. He has doubled the debt, is still running a huge PSBR deficit, has a record peace time trade deficit, has increase hundred of taxes hugely to well above the Laffer point, has mugged private pensions, put stamp duty up to absurd levels, ratted on his IHT promise, increase IPT hugely, mugged dividend recipients, has counter productively attacked non doms, mugged landlords and thus tenants, failed to sort out banking, destroyed saving and is still pushing expensive green loon energy with entirely pointless grants.

          He has also introduced a totally pointless and counter productive sugar tax that will surely cause far harm than good.

          Worse of all is the appalling idea that he personally should fix the wages of millions of people on a one size fits all national basis. This when he knows nothing about the companies they work for nor the jobs these people do.

          It will destroy UK competitivity, destroy investments, add to the the trade deficit, damage the economy, weaken companies, put up prices and cost somewhere between 60,000 and 600.000 jobs.

          The man is a total menace and an economic illiterate. He must go as soon as possible. Someone else is needed to start undoing the huge damage he has done.

          1. alan jutson
            April 5, 2016


            Sounds like we would have to pay someone to take him away then !

  10. John Bracewell
    April 4, 2016

    Thanks, your article today shows one of the risks in staying in the EU, that of being sucked into a German dominated economic regime which is gradually failing. The same would apply politically, regardless of so-called safeguards in the latest UK negotiations with the EU, the UK would find itself dragged into the one country which is going to be created with the Eurozone as its epicentre, or be disadvantaged in the EU by not being a part of that government to be created.
    Two large enough risks to make the length of any exit negotiation pale into insignificance, whether 2 years or 5 years, unlikely to be longer since the EU countries depend on the UK just as much as the UK does on the EU, if not more. It would be a small price to pay to extricate the UK from the long lasting (for ever) risks associated with remaining in the EU.

  11. Know-dice
    April 4, 2016

    I don’t think it makes sense for the UK to remain in the EU and not fully join the Euro and Schengen etc. How could we be on the periphery of the EU and have any useful influence without joining in fully?

    This is a question that should be asked of the Remainders.

    It is also patently obvious that if we remain that we will be sucked in to the black hole that is the EU.

    The only way that the EU can fully work is if the “richer” countries are reduced to the level of the poorer countries and that includes Germany, are the German people ready for that?

    1. Iain Moore
      April 4, 2016

      There is no solution to be had for us to fully join the EU and Euro, we saw the insanity of us being linked to a German dominated currency in the ERM, and we can see the recent examples of Greece , Italy , Span, Portugal etc of being locked into the Euro. No the only solution is for us to get out of the EU.

      1. Know-dice
        April 4, 2016


        My comment is really aimed at Remainders who believe that if we stay in, that the EU will remain as is and that WE actually have influence.

        Clearly this is not the case and the Remainders should be reminded of this at any opportunity.

  12. Nigel
    April 4, 2016

    Germany has an artificially low exchange rate by being in the Euro. If (or when) the Euro disintegrates, then the DMark will rise in value to its correct level (as set by market forces) and we can all trade on a level playing field.

  13. Lifelogic
    April 4, 2016

    Is it true as suggested that:- Vote for Brexit would lead to ‘implosion’ of the continental bloc, warns LSE chief?

    If the EU building is really that unstable then surely the sooner we leave the better.

    1. Denis Cooper
      April 4, 2016

      Have you seen this cracking letter in the Telegraph today?

      “Talking down Britain

      SIR – The Prime Minister and Chancellor are behaving with an irresponsibility that is unique among Conservative leaders in my experience. By choosing personally to lead the Remain campaign, and doing so by the use of largely baseless scare propaganda, they are damaging the nation’s economy.

      They are creating a fall in business confidence that can be used as a reason to persuade people to vote to remain in the EU. It is unacceptable that the leaders of any government should behave in this way.

      The proper economic role of government is to maximise the economic welfare of the state. This Government should be making it clear at all times that it will do whatever it can to ensure that the British economy is as robust as possible whether in or out of the EU.

      If, for example, it believes there is a danger that, on a vote to leave the EU, international financial institutions will consider moving from London, it should be publicising the general plans that any competent government will have for ensuring that this will not occur. These would include using the new freedoms to improve the tax, regulatory and support environment for such businesses.

      Instead, the Government’s position is that it would effectively punish the British economy in the event of a Leave vote by making no efforts in these directions.

      G J Wales
      Bishopsbourne, Kent”

      1. Know-dice
        April 4, 2016

        Too true DC.

        The Government needs to say what it will do when we vote to leave.

        Airbus today say:

        “We simply don’t know what ‘out’ looks like,”

        1. Denis Cooper
          April 5, 2016

          “However, our business model is entirely based on our ability to move products, people and ideas around Europe without any restriction”

          Which is the case for other transnational businesses, whose employees need to be reassured that one way or another their company would still be able to move products, people and ideas around Europe.

          Which in the first instance will probably be most easily be achieved by staying in the EEA as a transitional phase, despite those features that we don’t like and would want to change in the longer term.

      2. Lifelogic
        April 4, 2016

        Indeed. But it is not exactly what you would expect of our Cast Iron, no if no buts, at heart a low tax Conservative Prime Minister given his record and that he and Osborne are clearly finished after the Brexit vote.

      3. JoeSoap
        April 4, 2016

        Indeed, this is sufficiently irresponsible that there should be a GE in the event of a Leave Vote. A total misjudgement to play fast and loose with the British economy.

        1. bluedog
          April 4, 2016

          The real problem is a Remain vote. Whatever the outcome it seems the whole referendum could possibly go to a recount, the margin will be so fine. For a general election to resolve the matter would require a complete re-ordering of politics, with every MP in favour of Leave opposing all those in favour of Remain on a cross-party basis.

          A possible scenario is a Remain vote followed by a defeat of the government in the Commons on matters relating to the EU. If Cameron could not then restore his majority, a very difficult situation would ensue.

          If the vote is Leave, it is of course absolutely imperative that Cameron does not lead the negotiations for Brexit. His sole intent would be to frustrate the will of the people and reverse the result of any vote for Brexit, thus ensuring Remain.

          Off topic, the Panama Papers have the potential to put Cameron in an untenable position. Austerity? Tighten your belts? Moi?

          1. stred
            April 6, 2016

            The result could depend on the votes of the Irish, Cypriots, Gibbers and Maltesers. All of which would have an interest in not being isolated by a non EU state. In which case there should be a big fuss and refusal to accept the result.

            On the 5th, BBC lunchtime News put on a nauseating half hour of Eural doing a question with an audience in Birmingham. All the questioners seemed to have been selected for brown nose pro EU answers. I though there were expense limits for the referendum but the PM must be using the civil service to organise these propaganda events.

            Among his lies was a reference to the Leave side having to spell out what they would do about universities, research, farmers subsidies etc. Can we really believe that he has not read the Conservatives for Britain manifesto? Perhaps you should ask the other Out websites to make sure they have someting similar for him and his henchmen to read.

          2. stred
            April 6, 2016

            Sorry -questiontime and thought. Not on Chrome grammar on this PC.

    2. stred
      April 4, 2016

      There was some luvvie on the Andrew Marr show who did the usual luvvie spot about some Maths academic who got a bit too close to a young Indian maths student. At the end, Marr asked which way he was going to vote and luv explained that his heart was with Leave and controlling out own affairs (not love)- but the poor EU was in such a state with migration, unemployment and all that he would vote remain so that we could help them sort it all out. He obviously hadn’t read what the Spinelli chairmen, Verhofstadt and Cohn-Bendit have had to say on the matter and how many times we have been outvoted. And to think he has been playing a maths don!

      1. JoeSoap
        April 4, 2016

        Oh the strain of it all!
        Deciding between the romanticism of us looking after poor old us, ourselves, or being part of a wonderful club, amongst friends whom we’ll help and they’ll help us…. these people are as far from the real world as that chap who keeps cropping up on TV waving from a spaceship.

  14. Anonymous
    April 4, 2016

    The EU must distribute its wealth, opportunities, rights and its problems equally if it is not to become one state ruling all others.

  15. agricola
    April 4, 2016

    It is a round of actions and consequences that will continue to stagnation. Until those countries, whose economies fail to even approach that of matching Germany, have the courage to say enough is enough, and revert to their original currencies. Ultimately it will also bleed Germany to the point where they say no more.

    Problem is, they are dependant nations, and like dependant individuals there is a reluctance to bite the bullet, and start making decisions to correct the problems created by being a member of the Euro.

    With Cameron’s approval, on the nod, of Ukraine joining the EU and a potential rebellion in Holland against them joining, combined with the immigrant and associated terrorist problem created by Merkel, the EU is not an organisation I would wish to be part of. Even some Belgians I had lunch with yesterday recognise it’s deficiencies.

    1. Mitchel
      April 4, 2016

      The Dutch are only voting on an association agreement with the EU and Junkers has said it will be 20 years plus before Ukraine might be in a position to join.The real problem with Ukraine is its finances – it’s effectively in default but thanks to the IMF changing its rules not technically so at the moment.Russia has launched legal action in London over that issue.I’m not sure either the EU or the US is quite so keen any more- after all it is one big black hole financially and its strategic value has been diminished with the loss of Crimea(the US will have to console itself with possession-for safekeeping of course!-of Ukraine’s gold reserves).Ultimately I think it is quite possible that the country,or most of it, will return to the Russian orbit; the hardline nationalists in the western regions that hate Russia aren’t very keen on the EU either.

  16. Yosarion
    April 4, 2016

    Those that want ever closer union, you have said before John, need a transfer union, whether the German people want this will be the greatest test of the Germans true motives for the last sixty seventy years.

  17. Ian Wragg
    April 4, 2016

    Germany is hoovering up assets all over Europe when due to the structure of their business it is not possible to buy their businesses.
    Majority stock holders are banks and insurance companies which would never contemplate selling.
    Hence them becoming the senior partner in the sale of the LSE. Watch them transfer major parts of the business to Frankfurt and see how Gideon s plan works then.

  18. Chris
    April 4, 2016

    With regard to the power of Germany, and how the current EU model is apparently draining the lifeblood out of today’s youth, this EU youth unemployment chart illustrates the appalling situation for Spain, Greece, Croatia and Italy (over 40%), with another 12 countries over 20% youth unemployment. Germany is at the bottom of the table, with “only” 7.2% youth unemployment. It is small wonder that Germany wants to consolidate such a power and wealth base, but at what price?

    1. james
      April 4, 2016

      spain has had 20% unemployment before the euro, in the 1990s. spain’s high unemployment is due to labour market regulations, not the euro

      1. Chris
        April 4, 2016

        The source of the statistics was Eurostat, March 2015. Youth unemployment in Spain was 49.9% in 2015, so it has risen by 2 1/2 times, or 150%, since joining the euro, using the figure you quote for the 1990s. What a wonderful recommendation for joining the EU.

  19. Denis Cooper
    April 4, 2016

    “Some senior Germans think the UK should join the Euro if we stay in the EU.”

    Of course they do, and back in May 2010 when Merkel told Le Monde:

    “Our goal must be that all EU member States join the euro one day”

    she made no exception for the UK, or for Denmark which also has a treaty opt-out.

    Because we have that treaty opt-out we cannot be legally compelled to join the euro, but the economic and political pressure will inevitably increase as more of the non-euro EU member states join the euro, as they are legally obliged to do, and eventually we would have a UK government of whatever party or parties which succumbed and agreed to take us into it, with or without a referendum as they saw fit.

    The Czech Republic is now preparing to join the eurozone states lined up against us.


    “Pour Mme Merkel, “notre objectif doit être que tous les pays deviennent un jour membres de la zone euro”.”

    1. Vanessa
      April 4, 2016

      Denis – it is written into the Lisbon Treaty that THE EU CURRENCY IS THE EURO. No options or perhaps – we would HAVE to join at some future date.

      1. JoeSoap
        April 4, 2016

        Didn’t Cameron promise to negotiate that out?

    2. stred
      April 4, 2016

      Suggest someone translates this and puts it on Active’s website.

  20. oldtimer
    April 4, 2016

    Germany has run a substantial trade surplus with the rest of the world, including the EU, for many, many years. It is combined with a great sense of financial discipline and (historical) fear of inflation. We could do with some, a lot?, of that in the UK. It arises in part because most other countries and those who run them are relatively profligate in their attitudes to inflation and deficits. Germans also believe in a buy German policy. I know of a Dutch manufacturer who found it next to impossible to build sales of its products in Germany. So Germany now finds itself as the principal creditor in the EZ and thus the country wielding the biggest stick. It is not surprising that Finance minister Schauble views the prospect of Brexit as a “catastrophe” because the UK is the next biggest contributor to the EU budget, absorbs lots of otherwise unemployed migrants from other EU countries and thus releases pressure on German financial support for them.

    One looming problem for the German government and Angela Merkel is the prospect of yet another bailout for Greece and the write off of past loans; it is also a problem for the IMF and the EU. SpiegelOnline posted this account of recent negotiations on this subject between the IMF and the EU. In the past the German government has assured German taxpayers that their loans to Greece are not at risk. This assurance looks as though it about to be severely tested if IMF officials get their way in insisting in debt write offs as a condition of further IMF lending.

    Link here:

  21. Iain Moore
    April 4, 2016

    Germany is able to hide its surpluses in the Euro and not have to make much in the way of fiscal transfers that any normal common currency area would require. As such you might come away with the idea that Germany designed the EU and Euro to befit themselves, and probably view the EU club membership fees as good values for money compared to what they might lose in fiscal transfers.

    One of the reasons we had the economic failure in the 2007-8 was that the surplus countries , mainly China and Germany , had managed to rig the international financial markets so that the means to equalise out surpluses and deficits, through currency movements, no longer impacted on them. Germany by sitting behind the Euro, and China sitting behind a fixed exchange rate. At the time I was surprised it was ever allowed, and though President Bush , all be it late in the day, figured it out and read the riot act to China, and got some movement, our chump in charge Gordon Brown, went to China and basically said China could buy up any British asset they wanted with their surpluses.

    1. Mitchel
      April 4, 2016

      China has been buying up plenty of trophy assets in the US too under Obama.

  22. Denis Cooper
    April 4, 2016

    There have been EEC/EC/EU treaty provisions about balance of payments, right back to the 1957 Treaty of Rome where Article 3 actually put:

    “(g) the application of procedures by which the economic policies of Member States can be coordinated and disequilibria in their balances of payments remedied”


    “(h) the approximation of the laws of Member States to the extent required for the proper functioning of the common market”.

    In the present Treaty on the Functioning of the European Union:

    Title VIII is about “Economic and Monetary Union” and it starts with Article 119, in which the first paragraph says that member states will co-ordinate their economic policies, and the second says that there will be a single currency, while the third runs:

    “These activities of the Member States and the Union shall entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments.”.

    Reply Years ago when we had then a bad deficit with the rest of the EEC I wrote to the Commission and asked what they would do to help us remove it and get into line with the Treaty. The answer seemed to be nothing.

  23. Vanessa
    April 4, 2016

    JR – your phrase……but they have been quite unable to alter EU policy ….. speaks volumes (or should) to those who say we can reform the EU from within. If indebted countries cannot change anything then there isn’t a hope in hell’s chance of Britain being able to change anything. Why don’t people realise how entrenched the EU’s Controllers are in their dream WHICH CANNOT BE CHANGED !!

  24. ChrisS
    April 4, 2016

    Your second paragraph explains everything that is fundamentally wrong with a Eurozone that has such a weak and flawed structure that it has allowed one country to totally dominant both the Zone and the wider EU.

    The Eurozone and the EU simply cannot survive in this form.
    Current tensions can only get worse and relationships will deteriorate at an increasingly rapid rate. The only solution that does not involve Germany leaving the EZ or the Zone breaking up into several parallel currencies, will be politically unacceptable.

    Taxpayers in the countries running surpluses, particularly Germany, will not accept the truly massive financial transfers that will be necessary to keep the show on the road. These transfers now need to be so large that they can no longer be disguised as rescheduled loans.

    Very firm political and financial control from Brussels, and not, Frau Merkel, please note, from Berlin would also be required. To work properly, policy cannot be decided by German politicians and economists along the German model. Berlin may not agree with a policy decided by 27 countries in a proper fiscal union but they would have to accept and pay for it. It is inconceivable that German taxpayers would accept this.

    The other side of this is political integration : The ClubMed countries, especially France, Southern Italy and Greece, would have to accept drastic changes in the way their markets and employment systems work. This would be just as unacceptable to the French as the loss of economic control would to the Germans. We have clear evidence of this with the rise of Marine LePenn whose economic policies are far closer to the French Socialists than they are to the right, being both protectionist and fuelled by subsidies.

    Had the Scottish referendum gone the other way, we would now have a very similar scenario within our own islands :

    Imagine the tensions that would now exist between Edinburgh and London, had Sturgeon taken Scotland out of the UK ?

    With a £15bn current account deficit, and now outside the EU, Sturgeon would be demanding help for London and the IMF as she would have no hope of raising the necessary money in the markets to fund the current level of Scottish largess. She would try everything possible to avoid making cuts.

    Unlike the current situation in the EU, London would obviously refuse because we know that the current level of expenditure in Scotland is unsustainable without the massive fiscal transfers we are now having to make rather than loans. Neither would English voters support further generosity to Scotland after all the abuse that has been hurled in our direction.

    ( Few would argue that, had they been given a chance to express an opinion, English taxpayers would have agreed to support the level of subsidy to Scotland recently agreed by Osbourne).

    The English Treasury might offer to make soft(ish) loans to an independent Scotland but in return would demand drastic expenditure cuts in an attempt to balance the books which would make current “austerity” seem like the promised land.

    You can see the way this would go : Scottish resentment of its large neighbour would reach new heights and relationships at all levels would deteriorate. With that level of resentment, Scottish voters would give the SNP and its policies even more overwhelming support, but Sturgeon, or more likely her successor, would have to knuckle under, make drastic cuts or face financial meltdown.

    Does this not sound awfully familiar ?

    It’s exactly what has already happened in Greece.

  25. Bert Young
    April 4, 2016

    German domination of the politicised EU is shameful . Germany benefited substantially post war with the Marshall Plan and , as a result , was able to rebuild its manufacturing and other industries at low cost . The surplus Germany enjoys today is largely at the expense of other countries in the EU ; it should be employed in the same manner as they had under the Marshall Plan .

    I don’t decry the fact that there are malingering countries in the EU ; what I do decry is the way Germany now seeks to dominate economically and politically from within the walls of Brussels . Imposing a financial penalty on Germany would be entirely in order as a post war retribution .

    1. Mitchel
      April 4, 2016

      It is a good idea only for as long as they can have a controlling influence on Germany.Ever since the end of WWI the worst nightmare of the USA has been a coming together of Germany and Russia;politically they have never been in synch since but if a post-Merkel Germany turns to the right and focuses more on interests rather than “values”that could change.There are already quite significant anti-American and Russland Versteher movements in Germany.

      1. Mitchel
        April 5, 2016

        It was a point made back in 1919 by J M Keynes in “The Economic Consequences of the Peace”(still a good-and,if you skip the stats, quick-read btw)when the Bolsheviks had seized control but were still fighting the civil war.

        Back in May 2014,even after Merkel’s harder line,The Economist was quoting the former US ambassador to Germany,John Kornblum,as saying:”Germany has never figured out whether it wants to be part of the West….the Germans are the strongest,but are totally without a strategic sense.At the moment,they are almost as dangerous as the Russians”

  26. A different Simon
    April 4, 2016

    Germany must be the most debt forgiven country on earth .

    Why won’t they extend the same kindness to others ?

    Makes them look like a bunch of Teutonic hypocrites with short memories .

    Can’t wait to see whether they opt for more Merkel in the forthcoming elections .

  27. Kenneth
    April 4, 2016

    Also, Germans have trouble understanding the culture in Greece, and vice versa.

    Greeks will never adopt a Germanic outlook and the Germans will also not bend.

    Look at Italy. They are near-neighbours to Germany, yet, in the north of Italy, Germany runs many businesses. In these businesses the Germans prefer other Germans or Austrians in senior management roles, leaving the Italians to do the work.

    There is no lack of good Italian managers, it’s just that the Germans prefer to do things their way (probably the Italians do too).

    This is why the Euro can never work: trying to get people to work the same way when they are so culturally different is impossible.

    IMHO this is about happiness and not money. Making people act against their inherent instincts causes unhappiness.

  28. bigneil
    April 4, 2016

    When I read the title ” German surplus is causing tensions” I thought it meant the problem of the million+ ( and still rising ) (refugees ed) good ole Ange invited in. The title applies equally to our host’s blog and these.

  29. Antisthenes
    April 4, 2016

    I note you are not publishing some of my comments I would hate to think that it is because some of them them do not reflect yours or mainstream opinions. That of course does make them contentious and perhaps incendiary in nature. Not bad enough not to be published I would have thought. If I am barking up the wrong tree I would be grateful if you would enlighten me to the real reason. In specifics not in generalities would be appreciated. I am big enough to take criticism so feel free not too hold back. I criticise often in my comments I am sure so must allow others the same when responding .

  30. Atlas
    April 4, 2016

    Some of us think that Germany is achieving what some previous German leaders only dreamt of concerning dominating Europe…

  31. rick hamilton
    April 4, 2016

    A hundred years ago Germany was talking of creating a customs union post-war in which a defeated France and a vassal Belgium would participate, as well as Austro-Hungary, Netherlands, Italy and others. The British would of course be excluded.
    This ‘Mitteleuropa’ was to be controlled by the Germans. etc ed

  32. They Work for Us?
    April 4, 2016

    Off topic
    My local MP has finally got off the fence and has set out his reasons to REMAIN in the EU.
    I don’t agree with his conclusions and cannot see there is a case not to vote leave but at least he has finally set out his considerations

    1. JoeSoap
      April 4, 2016

      Indeed he has thought about it as a balance of risk,

      To summarise:

      I do not believe the evidence supports the contention that our membership of the EU results in a level of inappropriate interference in our national life resulting in unacceptable erosion of sovereignty.

      Certain members of the Port Talbot community might disagree.

      GH If we leave the EU we will be have to renegotiate our relationships with the EU and others and, in doing so, yield sovereignty in many as yet unknown ways and with highly unpredictable outcomes.

      JS At least we would have the choice to yield sovereignty as and when we wished rather than it being already yielded and us trying to clasp it back every time…

      GH The net economic effects of leaving are highly uncertain

      JS But in our control….

      GH We have achieved some small progress down the road of reform and I believe that the bigger prizes for the UK and the whole of the EU lie in further, more ambitious reform.

      JS But your Chief Negotiator promised this, and by your own admission failed, so either it’s impossible or he’s a hopeless negotiator, so which is it?

      GH In short I believe the evidence leads me to conclude that I’d prefer to remain in the EU and work to make it better rather than leave and take our chances.

      JS Well that doesn’t seem to have worked out in history. Did the Founding Fathers in the USA say “Hey Britain, we don’t like being subjugated and paying you taxes, but we’ll work with you to improve things?” Would the USA be better off today had they said that?

  33. Margaret
    April 4, 2016

    Of course, financial power is overall power.

  34. ian
    April 4, 2016

    Greece lost their chance last year to pull out before the ECB and Germany confiscate all their assets, now they want Greece to cut their pension in half, old age and civil servants pension, of cos they will never be able to repay the debt and it will grow,

    So just like hear with PFI the debt must be pay and all taxes the Greece people pay will not go to hospitals or schools or infrastructure and civil servants but to Germany and the ECB and IMF to repay the debt as they run up more debt to try to keep the country afloat, now when Germany leader call all refugees to come to Germany last year this was really attack on Greece as everyone else put up fences, that was for not cutting their pension in half.
    The IMF are fed up and want out of the debt they borrowed to Greece because it could end up killing more people in Greece than the Germany did in the second world war.

    The Germany say no debt relief for you and we want are bread making tool back.
    So you must ask who is next because the Greece had a vote and politician took no notice.

    They have done Cyprus so maybe Portugal is next, as always this being supported by your government staying in Europe to get their people the same treatment with a 300 billion building program for thing they do not want ending up 400 billion when finished.

    So you have 1.6 billion of debt at the moment with 400 billion PFI, so by 2021 it will be 2.3 trillion or more and with the building program there is no telling where it will end up by 2021 or your council tax bill and electric bill and in 2022 that when the council take over spending with the 8 areas to the relief of the government.
    If your not on the path to Greece I don’t know who is when there is talk taking over private companies pension on top like Tata steel, when you have sold everything off to private companies offshore, banks and pension funds of other country and they want their interest on the debt you have run up and interest on interest and all to come out of services and tax you pay then you are Greece.

    What can Greece do, they will no choice but to turn to communism and stop the money from going out of the country and default on the debt and only do business with country outside of the EU and that is if they are allowed to do that by the worlds institution who are on the EU side.
    It a one world government for the elite where they live on interest and do not have to worry about selling you anything because all you have go to them in interest to repay a debt that can never be repaid.

  35. oldtimer
    April 4, 2016

    Slightly OT: This article published by the IEA argues the geopolitical case against Brexit. Link:

    The author makes some sensible points, namely that renegotiating trade agreements will not necessarily be easy and could be protracted. He also quotes Hayek and others that loss of democracy is part of the price to be paid for the supremacy of international institutions. Personally I find the democratic deficit unacceptable. It is perfectly obvious, from past efforts and the “thin gruel” that resulted from Mr Cameron`s attempt at renegotiation, that UK influence counts for nothing. The UK is nothing more than a milch cow. But I suspect that others, such as Mr Cameron, are quite content to see our parliamentary democracy hollowed out. I should be interested to hear your views, in due course, on this aspect of the Brexit argument which has been given further prominence by the apocalyptic predictions by the French head of the LSE (about to be taken over by the German Bourse.

  36. Denis Cooper
    April 4, 2016

    I expect the Greeks could eventually become like the Germans, but I think it would take a few generations not just a few years. However it seems that the eurofederalists can often convince themselves and (some) others that “It’ll be alright on the night”; in this case, they glibly maintained that having the same currency would itself promote economic convergence between the countries which adopted the euro. But it didn’t work out like that.

  37. Dave L
    April 4, 2016

    While finding the evidence on this site quite persuasive for a Brexit, there is a nagging voice inside me that whispers “Look at the Mossack Fonseca issue. Doesn’t that reinforce your feeling that there lies a deep corruption in all ruling elites?” And with so much of the UK land, industry and housing in foreign ownership (especially Russian oligarchs and Middle Eastern Billionaires, all well-known for their total trustworthiness) does it really matter whether we’re being screwed by a European elite or a UK elite? We’re being screwed anyway. Corruption is a fact of life and probably always will be. Come on, Mr Redwood, give me some hope!

    1. Denis Cooper
      April 5, 2016

      Well, obviously the British people have a better chance of sorting out their own elite than the elites in other countries where they have no electoral leverage.

  38. ian
    April 4, 2016

    with 100 trillion globe of assets with price going up and 45 trillion in offshore tax heavens it a race to see if offshore can overtake onshore.

    1. JoeSoap
      April 4, 2016

      Presumably eventually it will. Offshore assets invested and spent sensibly, onshore assets taxed and pissed away.

  39. Margaret
    April 4, 2016

    And a nightingale sang in Barclay square.

  40. ian
    April 4, 2016

    As one look at the buy to let sector with council and housing association being order to sell all their stock to tenants or on the market with high value property and more rules coming in year on year to make buy to let unaffordable to do with mortgages meaning cash buys only, I can only conclude that at next election in 2020 the con party will be offering private tenants the right to buy their privately rented house or flat at a price below market prices like the council, it worth 6 million votes to them and all so the votes they will get from council and housing association tenants votes and also the banks will end with lot more mortgages with interest coming in all before interest rates start to go up with house price still rising.
    Of cos million more will be debt to the banks as they then push up interest rates with another bail-out for the banks and you put government debt on top of PFI and infrastructure building debt, car loans and anything else you can think of, it will be debt on top of debt on top of debt interest on top of interest with most of it finding it way out of the country and going offshore.

    That’s all you have to look forward to, debt and interest and don’t forget that housings and flats are include in how much money the country can borrow so if you get to pay off your loans you could get a knock at your door one day asking you to move out to pay the governments debt.

    April 4, 2016

    I’m not sure if I’ve missed some comments, but not a single person here seems to advocate allowing the euro to circulate in Britain alongside sterling (or indeed allowing euros to circulate in Greece alongside drachmas, or any other two-currency solution). This very sensible idea was proposed by the Treasury under Major in the early 1990s and almost universally ridiculed.

    That’s because most people, wise veterans of finance included, are trapped in a European post-1700 mindset where the rule of one-currency-one-sovereign-territory is so familiar from recent history that they simply cannot imagine multiple currencies circulating in one zone at once. Most people, again including professional financiers, are completely unaware that country-currency exclusivity is the exception rather than the rule, and that multiple currencies in a country were the norm during most of history.

    J.K. Galbraith (the older one) argued that the US between 1800 and 1850 had effectively a multiple-currency regime where under ‘Free Banking’ different banks’ bills, although all officially labelled “dollars”, were discounted at different rates by wholesalers and merchants according to the bank’s reputation. This meant that banks collapsed in ones and twos, rather than over-lending and then under-lending in step, creating co-ordinated waves of boom and bust (along with mass bank collapses together in step) as happens when a central bank is in charge.

    Galbraith also pointed out that the half-century where much of the US effectively had no central bank gave that country its highest growth of any half-century in its history right up to the present.

    So the discussion – including on this page where there are some very shrewd and interesting observations – is still locked into this post-1700 (or post-1870s in US terms) paradigm where a country must either “join” the euro or “leave” the euro, and where we cannot possibly ever _ever_ imagine two or three types of legal tender circulating in a country at once.

    Reply There’s nothing stopping you taking out contracts in Euros, but it is so much easier to go shopping with just one currency with physical money. What would the advantage be of shops quoting euro as well as sterling prices for those using cards? If you want to speculate on euros you can buy and sell them through the banks.

    1. JoeSoap
      April 4, 2016

      Reply to reply
      I think the point is that this (quite good idea) increases competition and decreases control of the CB on that country’s economy, which are on balance both a GOOD THING. Folk could choose to take jobs where they were paid in the alternative currency if they were available, save and pay bills in that currency. In the case of the Euro, I think an early choice under Major in the UK would have given a pointer to people of the problems which have since become more apparent with the Eurozone.

    2. forthurst
      April 4, 2016

      “Galbraith also pointed out that the half-century where much of the US effectively had no central bank gave that country its highest growth of any half-century in its history right up to the present.”

      Interesting point, however the private secret fed was set up by and for the enrichment of Wall Street crooks not in order to facilitate growth in the wider economy; its deliberate squeeze to create the Great Depression leading to mass starvation and bankruptcy and the seizure by banksters of property for pennies on the dollar was but a forerunner of later eggregious actions performed under the guise of monetary rectitude.

    3. S Matthews
      April 4, 2016

      Many businesses do accept payment in several currencies (Sterling, dollar and Euro mainly). So I am not sure of your point, the situation already exists.

    4. Denis Cooper
      April 5, 2016

      It’s the legal tender status that he wants, not just free circulation.

  42. Mike Wilson
    April 4, 2016

    Mr. Redwood – slightly off topic but not completely … I read that Germany, France, Holland and Sweden have viable steel industries. Do you have any idea why they have viable steel industries and we, apparently, do not?

  43. Lindsay McDougall
    April 6, 2016

    It’s ‘Follow the argument where it leads’ time again.

    It follows from what you write that we should do everything in our power to destroy the Euro and, with it, the Euro-Zone. Yes? No?

  44. petermartin2001
    April 14, 2016


    “I fully understand the German view that they work hard and manage well to produce a surplus, and they expect others to do likewise. ”

    I don’t believe you can understand this JR, because the German view doesn’t make any sense at all. It would be like Claudio Ranieri saying that because Leicester City have won more matches than they have lost this season, then there is no reason why all the clubs in the EPL couldn’t win more than they lost too if only everyone else followed their example.

    Just as the number of wins has to equal the number of losses in any football competition so there has to be an equal number of euros which are in surplus as there are in deficit. In other words German surplus euros have to come from somewhere. Trade on a world scale does have to balance and all trade deficits and surpluses have to sum to zero ultimately.

    Having said that I don’t believe we have to think of trade deficits as ‘losses’ or trade surpluses as ‘wins’. But that of course is the German view. However, if they thought of their surplus as perpetually trading a higher value of goods and services for a lower value then they might have cause to think that they aren’t the ones who are coming out ahead.

Comments are closed.