{"id":24753,"date":"2015-02-21T08:01:51","date_gmt":"2015-02-21T07:01:51","guid":{"rendered":"http:\/\/www.w-t-w.org\/en\/?p=24753"},"modified":"2015-02-21T08:01:51","modified_gmt":"2015-02-21T07:01:51","slug":"germanys-conundrum-the-lockstep-euro","status":"publish","type":"post","link":"https:\/\/www.w-t-w.org\/en\/germanys-conundrum-the-lockstep-euro\/","title":{"rendered":"Germany’s Conundrum: The Lockstep Euro?"},"content":{"rendered":"

Patrick Chovanec writes: Contrary to popular mythology there\u2019s absolutely no reason why being \u201ccompetitive\u201d should mean running a trade surplus. As far back as 1817, the economist David Ricardo pointed out<\/a> that the optimal basis for trade is comparative, not absolute, advantage. In other words, even if a country is better at everything, it should export what it is best at and import what it is less better at. Having an across-the-board advantage does not imply that it makes good economic sense to produce everything yourself, much less to sell more than you want in return.<\/p>\n

Trade surpluses take place when a country chooses to spend less than it produces \u2014 when it has excess savings, beyond its domestic need for credit. It lends that excess savings abroad, financing another country\u2019s ability to spend more than it produces and, by running a trade deficit, purchase the lender\u2019s excess production. It\u2019s true that a highly productive country might have the wherewithal to conjure up excess savings, while a less productive country might be inclined to borrow rather than scape up the savings it needs. But fundamentally, trade imbalances arise not from competitive advantage but from choices about how much to save and where that savings should be deployed \u2014 at home or abroad.<\/p>\n

The eurozone crisis is often called a debt crisis. But, in fact, Europe as a whole did not have an external debt problem, but an internal one.<\/p>\n

German surpluses and mounting debt in Europe\u2019s periphery were two sides of the same coin. Germans saved (a lot), and the single currency induced them \u2014 rather than save less or invest it at home \u2014 to lend it to their eurozone trading partners, which used the money to buy German goods.<\/p>\n

Normally, each country would pursue its own monetary policy, relying on exchange rate adjustments to shift the locus of demand from those that could not afford it to those that could. Under a single currency, though, this could not happen. Instead, Europe\u2019s debtors were forced to slash demand, through a combination of fiscal austerity and debt deleveraging. Their trade deficits with Germany fell dramatically \u2014 but by buying less, not selling more. All of the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) saw their total trade with Germany shrink. To the extent Europe rebalanced, it did so at the cost of growth.<\/p>\n

The eurozone was caught in a trap. Its countries needed to move in two separate directions, but under a single currency, they could only move in lock step. A Europe that lived within its means meant a Germany that continued to save more than it spent, rather than driving much-needed demand. Monetary easing \u2014 and a weaker euro \u2014 merely redirects Europe\u2019s internal imbalances outward. Germany\u2019s trade surplus with the United States exploded (up 49 percent from 2007 to 2013), and deficits with China and Japan collapsed (by negative 71 percent and negative 78 percent respectively). Meanwhile, Germany\u2019s trade balance with Brazil and South Korea flipped from deficit to surplus.<\/p>\n

Since 2012, virtually all of the eurozone\u2019s net GDP growth, on an annual basis, has come from net exports \u2014 further testament to the weakness of domestic European demand as a driver of growth. It\u2019s doubtful, however, whether relying on Americans to pile on more debt \u2014 and risk going the way of Greece \u2014 is really a reliable strategy. In principle, narrowing Europe\u2019s trade deficit with China makes more sense. But in practice, this has consisted less in tapping China\u2019s mass consumer market than in selling machinery and luxury goods into China\u2019s credit-fueled investment boom, which itself is predicated on maintaining an outsized trade surplus with the United States. The issue isn\u2019t \u2014 as it\u2019s so often framed \u2014 what\u2019s fair, but what\u2019s sustainable. And Americans playing the world\u2019s consumer of last resort, by borrowing to live beyond their means, isn\u2019t sustainable.<\/p>\n

So what should be done? The best solution \u2014 and the least likely to be adopted \u2014 is for Germany to leave the euro and let a reintroduced Deutsche mark appreciate. Here, the experience of the 1985 Plaza Accord offers some encouragement. While a stronger yen made barely a dent in Japan\u2019s structural trade surplus, German behavior proved far more responsive to the incentives embodied in a stronger mark.<\/p>\n

In the past year, German politicians have proved far more willing to try boosting demand by raising the minimum wage, cutting the retirement age, and increasing pensions \u2014 moves that may work, but risk harming productivity, which is ultimately the source of Germany\u2019s capacity to consume. Perversely, those same politicians refuse to cut taxes or boost public spending, which in 2014 resulted in Germany posting its first balanced federal budget since 1969, a year earlier than planned. To most Germans, any suggestion that they should relax this fiscal discipline smacks of Greek-style profligacy, but there\u2019s another way to think about it. The excess savings are already there; the only question is where to lend it all. Borrowing it domestically to drive a genuine European recovery might be preferable to (once again) throwing it at foreigners to buy things they really can\u2019t afford.<\/p>\n

With an aging population, perhaps it\u2019s understandable why Germans want to save. But there is no inherent reason to direct that savings abroad when there is a far more crying need to deploy it at home. The \u201cgrowth\u201d Germany generates by funding unsustainable trade imbalances \u2014 inside and outside the eurozone \u2014 is an illusion. It is growth that is borrowed, for only a while. For Germany, and for the world, it\u2019s a bad trade.<\/p>\n","protected":false},"excerpt":{"rendered":"

Patrick Chovanec writes: Contrary to popular mythology there\u2019s absolutely no reason why being \u201ccompetitive\u201d should mean running a trade surplus. As far back as 1817, the economist David Ricardo pointed out that the optimal basis for trade is comparative, not … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":22,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"footnotes":""},"categories":[13],"tags":[],"class_list":["post-24753","post","type-post","status-publish","format-standard","hentry","category-finance"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t