Economic relations between Germany and southern Europe

Two interpretations have been advanced to account for persistent German current account surpluses that translate into equally persistent deficits of countries in the European periphery. According to the first, the German surplus is the expression of a ‘virtuous’ savings behaviour, to be extended to the periphery. The second maintains that the increase in net exports reflects the stagnation of German domestic demand. The paper argues that differences in price competitiveness are only part of the explanation of the disequilibria and that an expansion of German internal demand, albeit necessary, would not suffice to provide a viable response to the long-term sustainability of the euro area. Adopting a multilevel perspective, the paper argues that to understand the persistence of deficits in the European periphery, the main features of the reorganisation of the German economic system, including its income redistribution and demand implications, should be considered. Three elements are singled out: the effects of eastward enlargement, the impoverishment of the productive matrix of peripheral countries and the quality composition of trade flows. This analysis, it is argued, is a crucial premise for devising trade and industrial policies targeted on redressing the increasing skewness of EU trade, especially through greater trade among the deficit countries.