The talk has always been about the China being the big current account surplus, but Germany the number two exporter is also running a large current account surplus. This has been the stealth current account deficit because much of it is with other countries in Europe. The PIGS are running current account deficits with Germany, so we are having a microcosm of the US and China savings problem.
The PIGS are running excess investment over savings through their government deficits which mean that the difference has to be financed from savings outside the country. This is equivalent to saying that imports or consumption exceeds income generated from exports. The funds are coming form surplus countries and their export engine. Germany.
Similar to the China - US issue, the rate of exchange between Germany and Greece is fixed. This is what happens when there is optimal currency area like the euro. While there is a discussion about appreciation of the yuan to "solve" the problem in Chimerica, there is no such option available to the EU.
Similar to China, Germany does not want to be pushed into a change and they resent the "financing" of Greek debt, or even the believe that they are responsible for the problem. The trade engine has been a substitute for domestic growth similar to China. The trade surplus was 5% of GDP last year for Germany. The savings or trade imbalance across the EU is the dirty secret of international finance.
Since the EUR is a construct for all of the EU, Germany has the advantage of a cheap currency. Yes, the EUR was overvalued last year, but the DM would have been higher given the economics of Germany.
The choices for the EMU are limited. One option is that real wages in Greece fall along with a cut in government spending to restore the trade - savings imbalance. The other alternative is to have Germany share the burden. A bail-out and write-off of debt would be a simple but not very palatable choice. Someone has to take the pain. Someone has to pick their poison. As stated by Peterson Institute's Posen, "We're past the point where constructive ambiguity is constructive."
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