BlogSpot - November 12th, 2013
Is Germany harming of serving the world economy?
In a series of columns (1, 2, 3, 4, 5, 6), Paul Krugman launched a debate about the German current account surplus. Jeremie Cohen-Setton presents a comprehensive BlogSpot on the issue. In a first article (based on the semi-annual report of the U.S Treasury department that sharply criticized the surplus), he notes that imbalances were amplified during the crisis, as the reduction in public deficits in many euro-countries was not offset by a reduction of surpluses and/or an increase in domestic demand in surplus countries (i.e., Germany). A second article stresses that Germany’s current account surplus must not be taken as a sign of economic performance, but rather points to the low level of German investments in the world economy. His policy prescription is higher public spending instead of accumulating savings, as a responsibility in the global economy.
Matthew Klein recalls that the claim that “the trade surpluses reflect the strong competitiveness of the German economy and the international demand for quality products from Germany” is just wrong—it simply reflects the balance between domestic production and consumption. Matthew Dalton, in the WSJ RealTime Brussels blog, asks whether the superior quality of German goods or low wages explain the German surplus—and finds that wage restraint seems like the best candidate available to explain the German surplus (notably because German competitiveness is not a new factor that could drive the recent widening of the CA surplus).
Ryan Avent reminds us that a CA surplus would usually generate an exchange rate appreciation, eventually reducing the surplus—but this adjustment is not available in the case of Germany, and its surplus captures a large share of available (and scarce) external demand across the developed world. FreeExchange (see also Uneasy Money, hat tip Cohen Setton) compares the situation with the early 1930s when France took advantage of its undervalued currency to support exports, accumulate gold reserves and avoid inflation—though today the ECB can theoretically counter deflationary pressure. Francesco Saraceno writes recent reforms (à la Germany) has moved the eurozone from balance to a small (1.9 percent) surplus, depressing aggregate demand at the global level. Charlemagne criticizes the lack of symmetry in the European macroeconomic imbalances procedure, triggered only by CA deficits greater than 4 percent of GDP with no action on large surpluses.
Simon Wren-Lewis writes that the problem is with the macroeconomic myths leading German policy making astray: (i) that the EZ crisis stemmed from fiscal irresponsibility in the periphery eurozone countries; (ii) that fiscal policy has no place in managing aggregate demand (safely in the hands of the ECB); and (iii) that, to be independent, central banks must never buy government debt.
In a Project Syndicate note more favorable to Germany, Harold James argues that Germany provides best practice for other European countries. Beyond current economic performance, James highlights Germany’s long-term trend to step aside from its own national sovereignty to the benefit of European Integration. MainlyMacro points out that in the absence of a European fiscal union, it is understandable that Germany acts in its own interest to curtail unemployment and inflation. So the real issue is about strengthening the euro-zone…
And the priority is: structural reforms!
The European Commission Autumn forecast 2013 assumes gradual recovery (see speech by Olli Rehn). For an interactive map, check GraphicDetail.
In a Project Syndicate article, Jean Pisani-Ferry argues that unlike the US, Europe is not placing return to growth high enough on the political agenda, possibly because of a short-term focus on dealing with the sovereign debt crisis, and possibly because there is no consensus on the right policies. Yet Pisani-Ferry stresses the importance of growth for Europe, and calls for it to be at the center of a new European “compact.” For Isabella Rota Baldini and Paolo Manasse, in VoxEu (see also Manasse in EconoMonitor), the crisis exposed important structural problems in the Eurozone, making the recovery so difficult and slowing down economic convergence after the crisis—with some striking data: (i) the crisis hit harder countries that showed weaker improvements in productivity in the 2000s; and (ii) countries with most fiscal tightening recorded deeper contractions. This was compounded by the lack of institutional shock absorbers, such as an inter-state transfer system. Addressing these shortfalls is a priority. This point is reinforced by Lorenzo Bini-Smaghi, in VoxEU, argues that the unwelcome austerity during the recession was driven by lacklustre structural reform before the crisis, low pre-crisis growth with unsustainable living standards and welfare systems. The way out of austerity is fundamental pro-growth reforms that create room for more gradual fiscal adjustment.
As part of a solution to Europe’s economic slump, Bruegel looks at the relative decline in European manufacturing, yet stresses its transformation towards higher valued-added, more innovative and higher-skilled activities. In particular, the increasing “servitisation of manufacturing” – i.e. a strategy of creating value by adding services to manufactured products – is a key driver of innovation, providing new opportunities for European firms integrated in the global value chains. Many challenging reforms are necessary to accompany this process, but Europe still has considerable advantages through its network of infrastructures, pools of specific skills, innovative capacity and developed capital markets and funding schemes.
The short view: let’s talk about well-being…
The OECD’s How's life? report shows that the crisis has had a great impact on citizens’ life and trust in their government and institution. As stressed by RealTimeEconomics, there is room for improvement in all countries.
