Nicholas Watson in Prague -

On November 15, the European Commission warned that five Eurozone countries are likely to breach debt and deficit rules in 2014, with Germany and Estonia the only two out of the 17 single-currency members on track to fully comply with the bloc's targets. The Commission, however, is worried about Germany for a quite different reason: its growing surpluses.

Two days earlier, the Commission announced that it has launched an inquiry into whether the large current account surplus that Germany runs is harming the wider European economy and hampering its recovery. European Commission President José Manuel Barroso stressed that this inquiry would not be an exercise in condemning the competitiveness of German industry, "but whether Germany, the EU's economic powerhouse, could do more to help the rebalancing of the EU economy."

The latest figures certainly underline the problem. Germany's trade surplus, the largest part of the current account, rose to €18.8bn in September from €15.8bn the previous month as exports continued to grow at a faster pace than imports.

These figures are causing dismay to Europe. Why? The reason is that many economies, especially those in the rich world, are suffering from a shortage in both internal and external demand. Germany's growing current account surplus indicates that it is soaking up a big chunk of that available external demand.

Before the Eurozone, that would cause the self-correcting mechanism of an appreciation in the value of German's currency, the deutschemark, to kick in. This would cause Germany's surplus to fall as the cost of its exports rise and imports fall. But today Germany doesn't have its own currency - it shares the euro with another 16 countries. That means real exchange rates can only adjust through changes in relative unit labour costs, such as wages. This also comes at a time of austerity measures being applied across Europe as governments try to cut their debt levels, which is exacerbating the fall in domestic demand.

The upshot is that Germany's current account surplus is reducing demand across the rich world, exerting deflationary pressures.

Critics and defenders

The Commission is not alone in highlighting the problem of Germany's supluses. In the latest report to Congress, the US Treasury pointed out that, "Germany's anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy."

The prescription is for Germany to increase its domestic demand by the government raising spending on things like infrastructure, getting Germans to open their wallets and purses, as well as liberalising parts of the economy, particularly the service sector.

However, Germany isn't taking this lying down. Predictably, its criticism has been a touch defensive, that somehow Germany is being blamed for the Eurozone's wider problems that are the fault of feckless governments, especially in the southern European states.

Ralph Brinkhaus, a member of the Chancellor Angela Merkel's Christian Democrats (CDU) in the German Bundestag, says that while he accepts the Commission's right to launch the investigation, he feels there is a growing attempt by some countries' politicians to shift responsibility from their own economic mismanagement to Germany. "When I see some countries refusing to undertake difficult reforms, they prefer to blame Germany," he told the BBC's Today programme.

Many also question whether crisis-hit Eurozone countries would really profit from a more expansive fiscal policy in Germany. "The positive knock-on effects would be limited," Jens Weidmann, president of the Bundesbank, was quoted by the Financial Times as saying.

Finally, Germany's defenders point to the most recent data as showing the situation is already improving. The statistics office reported that German growth of 0.3% in the third quarter was driven by domestic demand, while exports were "less dynamic" than in the three months before. And German imports from Eurozone countries in September increased 1.8% on year, while those from the rest of the EU rose 4.4%.

With Moody's Analytics predicting that Germany's exports should slowly improve as the Eurozone starts to emerge from recession, this issue is unlikely to go away soon.