3. At the 2014 G20 conference in Canberra, U.S. Secretary of the Treasury, Jack

Question

3. At the 2014 G20 conference in Canberra, U.S. Secretary of the Treasury, Jack Lew, warned that the euro zone economies face a decade of economic stagnation unless their economic policies change and that the “world economy could not afford a European lost decade”. Joining this criticism was Prime Minister David Cameron of the United Kingdom. The German government came under increasing pressure at these meetings over the persistent current account surplus that Germany has been running in recent years. These surpluses, it is argued, have helped to contribute to the poor economic performance of, especially, some of the other countries in the euro zone. These critics urged the euro zone in general and Germany in particular to take measures to shrink its surplus.

Explanation / Answer

An economy is balanced when it consumes and invests almost the same amount it produces. If it consumes less and invests less than it produces, then there will be a surplus in production, businesses will contract, unsold goods and the economy will shrink until the consumption plus investment once again equals the production. A country like Germany which fits the above case is avoiding the economic contraction by passing on the problem to other country by selling more and more goods than it imports. So the other countries which are getting dumped with German products are facing the heat of extreme trade deficits and where Germany is enjoying the extreme trade surpluses.

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