Germany's Angela Merkel needs a dressing down, not the red carpet treatment

Recent data point to an even wider deficit last year. Were it not for this trade imbalance with Europe, Britain might actually be a surplus economy, such is our balance of payments position with other Anglo-Saxon economies. More than a third of this deficit is accounted for by Germany, which dwarfs the next largest surplus economy, China, and as a consequence is fast becoming Britains biggest creditor.

Some of the reasons for this success are obvious enough. Germany makes some of the most desirable cars, vacuum cleaners, washing machines and other consumer goods in the world. It also makes some of the best machine tools, construction materials and so on.

Yet there is a less benign reason, too it is also because of mercantilist policy in Germany, which prioritises exports over domestic demand, and because of extraordinarily accommodative demand management in Britain. Neither policy is ultimately sustainable. Britain cannot forever keep supporting European demand through credit-fuelled monetary and fiscal stimulus. Nor can Germany indefinitely keep clocking up charges against its main export markets. Eventually debtors will find a way of defaulting, or otherwise escaping their obligations. In the meantime, Britain grows, providing Germany with abundant export markets, even as Europe languishes.

At approximately 5pc of GDP for both the budget and the current account deficits, Britain already has one of the biggest twin deficit problems in Europe. The government continues to borrow to spend at heroic levels. The UK is also one of the few economies in Europe which is seeing decent levels of private sector money and credit creation, sucking in imports from abroad.

If the European Central Bank ever gets round to quantitative easing, it will primarily be to provide stimulus for the demand-starved economies of the eurozone, where price inflation has now almost certainly gone negative. This may, however, already be a hopeless endeavour. Yet one thing European Central Bank action most certainly will do is further depress the euro, providing another boost to the German export machine. The euro is already far too low for a big surplus economy such as Germany. QE threatens to make matters worse still.

That Germany cannot seem to recognise the lessons of its success in British export markets, and apply them to the wider context of Europes economic crisis, is one of the deeper mysteries of the whole wretched mess.

It doesnt matter how competitive your exported goods happen to be, they will not be successful unless there is sufficient demand for them. Just ask the Greeks, who no longer buy Porsches, Mercedes or Miele washing machines on anything like the scale they used to.

Austerity policies have had such a damaging impact on demand in many eurozone countries that previously yawning current account deficits have shrunk to virtually nothing, or even gone positive. Unfortunately, within the eurozone itself, imbalances in trade have, if anything, got even worse since the crisis began. Germany has increased its surpluses even as demand has plummeted. If even in the depression-like conditions that exist there, Spain still cannot run a current account balance with Germany, there is a basically insolvable problem at the heart of monetary union. Merkel's failure, or refusal, to grasp this point, speaks to a wider failure as a European leader. For Germans, she is for the moment a national treasure; yet the history books will not be kind on her.

Germany this week reported that its inflation rate had fallen to 0.1pc. Its five-year bonds yield virtually nothing, and some inflation-linked bonds have been negative on and off since the crisis began. In other words, Germany is not expected to show any inflation any time soon. Nobody's going to invest; nobody is going to spend. The internal devaluation thus needed in other countries to regain competitiveness with Germany has become more challenging still; for some countries, prices will need to keep deflating for years to come. Its a hopeless situation, as Alexis Tsipras, the otherwise profoundly unsound leader of Greeces radical left Syriza party, has evidently recognised. Something has to give.

German export success is being bought at the cost of economic calamity throughout much of the rest of the eurozone. As one of the main architects of this catastrophe, Ms Merkel should be held to account, not lauded.

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Germany's Angela Merkel needs a dressing down, not the red carpet treatment