Competitiveness and trade balance dynamics between Germany and the other euro-zone countries

The supply of goods and services is greater in Germany than in the other euro-zone countries , thanks to Germany’s higher employment rate. This would normally be expected to lead to a situation where Germany has an external surplus with the rest of the euro zone and the rest of the euro zone builds up external debt with Germany. The rebalancing would then take place via a fall in Germany’s savings rate, as its wealth rises , and via faster increases in wages and prices in Germany than in the rest of the euro zone, correcting Germany’s external surplus. But the current situation differs from that which is usually expected because of the end of capital mobility between Germany and the rest of the euro zone, which has forced the rest of the euro zone to eliminate its external deficit (increase in savings, reduction in investment). Germany is accumulating external assets no longer with the other euro-zone countries but with the rest of the world: this has led the adjustment to take place via an appreciation of the euro and not via an internal adjustment within the euro zone.