Friday, January 20, 2012

The euro crisis and balance of payments

One integral aspect of the euro crisis that doesn't get mentioned in news stories as often as others is the balance of payments/trade deficit part. Looking at that side of the problem is a reminder why the advice of Germany's Chancellor Angela Merkel and her Angie-bots that other eurozone countries should remake themselves in Germany's interest is so absurd in the current situation.

Heiner Flassbeck deals with it in A German end to the Euro vision Euro Intelligence 18.01.2012, as does Wolfgang Münchau in Wir bekämpfen die falsche Krise Spiegel Online 18.01.2012

Germany relies heavily on exports. Most of their exports are to Europe, and a large proportion to other eurozone countries. So Germany has been the single biggest winner to date from the trade advantages of the common currency.

Because Germany exports more than it imports, it typically has a surplus in its balance of trade. Those of its trading partners who import more than they export run trade deficits. We could say that the laws of accounting make impossible a situation where every other eurozone country could develop a similar model to Germany's by running surpluses with lots of other eurozone countries.


Since the end of Bretton Woods, Germany’s economic policy has been based on two main pillars: competition of nations and monetarism. Both are irreconcilable with a monetary union. A monetary union is in essence a union of countries willing to harmonize their rates of inflation and to sacrifice national monetary policies. A country like Germany, fighting for higher market shares in international markets, tries to achieve the opposite. It has to undercut the cost and price level of its main trading partners by all means. A monetary union formed by already closely integrated countries becomes a rather closed economy and needs domestic policy instruments like monetary policy to stimulate growth time and again. German monetarism asks for the opposite, the absence of any discretionary action of central banks and relies solely on flexibility of prices, in particular wages.

Along these lines the story of EMU’s failure is quickly told. From the very beginning of the monetary union, German politicians put enormous pressure on trade unions to help realise an increase of unit labour cost and prices that was less than in other countries. Since member states no longer could devalue their currencies to maintain competitiveness as they had done hitherto this was a rather easy task. The effects got stronger as small annual effects accumulated over time and, after ten years, created a huge gap in competitiveness in favour of Germany. Germany built up huge current account surpluses and Southern Europe and France accumulated the complementary deficits. [my emphasis]
Münchau discusses this problem in the context of differential rates of development in the eurozone. And he reminds us that even if the European institutions were doing what needs to be done to save the euro in the short run - which they aren't doing and can scarcely be expected to do so at this point - it won't fix the euro's problem in the longer run without a real fiscal and transfer union that would systematically promote more balanced development within the eurozone.

Flassbeck's bottom line on the Merkel/Sarkozy austerity course they've imposed on the eurozone: "Captain Merkozy's boat approaches the rocks at high speed."

One notable aspect of Flassbeck's piece is that he articulates the consequences for peace and democracy of a European Union crackup:

Once upon a time European leaders believed in a step-by-step approach of European integration. Each step would bring Europe closer to the target of closely related but still independent states. According to this vision states would be willing to relinquish more and more of their independence, in order to gain advantages of peace, global strength through political cooperation and economic strength as a result of a big common market. In this approach, the creation of a monetary union was just one of these consecutive and unavoidable steps on the path to strengthen political cooperation and to complete the common market with its indisputable advantages for all European citizens. [my emphasis]
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