Germany rejects U.S. criticism of export reliance

BERLIN (Reuters) - Angela Merkel's conservatives on Thursday rejected U.S. criticism of Germany's dependence on exports but her likely future coalition partner agreed Europe's bulwark economy must do more to spur domestic demand. The United States has long called for countries like China and Germany with trade surpluses to do more to spur imports but the Obama administration's reprimand in a semi-annual report to Congress on Wednesday stood out for its stark language. It said Germany was hampering economic stability in Europe and hurting the global economy. Both Merkel's conservatives and the center-left Social Democrats, who are in talks to form a coalition government after a September election, retorted that Germany would continue to strive to be competitive globally. "We have always been a strong export country and we are proud of that," said Ilse Aigner, the conservatives' lead negotiator in coalition talks for economic issues. Her SPD counterpart Hubertus Heil said, however, Germany must become aware of its "duty" to strengthen domestic demand, which meant championing salary rises and stimulating investment. Germany shook off the label of "the sick man of Europe" after reunification more than two decades ago in part through years of wage restraint that made it more competitive. But now its economy is outpacing peers and it is under pressure to do more to help the euro zone out of its crisis by stimulating domestic demand and as a result, taking more imports from the rest of the currency bloc, its main trading partner. UNTIMELY CRITICISM The U.S. criticism comes at a tricky juncture in relations between Washington and Berlin. German envoys met the White House national security adviser in Washington on Wednesday after reports the United States monitored Merkel's cellphone. Germany argues that it has more than halved its trade surplus within the euro zone as a share of GDP since 2007. Trade is expected to subtract rather than contribute to economic growth this year, with imports outpacing exports, while domestic demand, albeit still weak, will drive growth. "Within the euro zone, the German trade surplus has come down rapidly from a pre-Lehman peak of close to 5 percent of German GDP to 2 percent now," said Holger Schmieding at Berenberg Bank. "That is a significant adjustment." He argues the rise in the trade surplus with the rest of the world, including the U.S., was due purely to competitiveness. Put differently, Germany's surplus has come largely because it is producing the sort of goods fast-growing economies like China and India need at the right time. "And as the rapid turnaround at the euro periphery from big current account deficits in 2008 to surpluses now shows, the euro periphery is also becoming fairly competitive," Schmieding said. Berlin's critics on the other hand note its overall current account surplus last year was 6.9 percent of gross domestic product - higher even than the 6 percent threshold the European Commission considers excessive. They say Germany is still saving too much rather than spending and also needs to liberalize parts of its service sector, which would shift resources gradually from export industries and so boost domestic demand. The SPD does agree with many economists that Germany can still do more, which may be reflected in the coalition deal, expected at the end of the year. In its election campaign, the SPD called for a hike in public investment, which has decreased as a share of GDP over the last decade, and for a minimum wage. (Reporting by Gernot Heller and Sarah Marsh; editing by Patrick Graham)