“Study Economics, Mr. Editor!”

This dictum paraphrases the late legendary Austrian Chancellor Bruno Kreisky in 1981 (“Learn history, Mr. Editor!”), when he attacked ORF editor Ulrich Brunner when Brunner asked him about the Social Democratic Party’s potential involvement in a corruption scandal concerning the construction of Austria’s largest hospital (AKH) in Vienna.  I would like to extend and amend this exhortation to the many German speaking critics of the EU Commission most recent investigation of Germany’s exorbitant current balance surplus of over 6% of GDP. Most commentators deplore this investigation as punishment for the EU’s “most successful economy”, which attained its position because of “stunning technology and quality” which put its economy into  its deserved global position.

The facts: After a long time, the EU has realized that “economic policy coordination” is not sufficient to focus on government deficits and debt, but needs to include the private sector as well.  Imbalances in the Eurozone include trade positions, inflation rates, wage rates and other aggregates. Thus, as a result, the EU also checks these positions, country-by-country. Let us remember that two of the present “crisis countries”, namely Ireland and Spain, did not run into trouble because of their budget deficits, but because of their private sector, i.e. real estate and its financing, problems. This is a positive development of EU economic policy surveillance. But still, there is a problem. While the EU recognizes, correctly, that foreign trade balances play an important role in stabilizing the Eurozone, they still value trade deficits at a target value of 3% of GDP more negatively than trade surpluses, where the trigger value for “excessive imbalances” starts at more than 6% of GDP. Balance – Imbalance??

This discussion, how to value positive or negative imbalances, is reminiscent of the Bretton Woods discussions in 1944, when the new world economic order was established. John Maynard Keynes, the British negotiator, argued in favor of adjustment needs both by deficit and surplus nations. He realized that there is nothing inherently positive about running a structural balance-of-trade surplus, because that imposed deficit positions for the other countries. Thus he argues for symmetrical adjustment requirements of both deficit and surplus countries realizing that once country’s surplus is another country’s deficit. He lost the (political) argument to Harry Dexter White, the US negotiator, who wanted to protect the US’s position by putting all the adjustment burden on deficit countries. This became the model on which the IMF, a creation of this conference, was based until today. The EU Commission’s position to “survey” current balance deficits when the 3% limit is reached, but surpluses only when 6% are surpassed, is reminiscent of this (supply-oriented) position.

Here comes the divergence of micro- and macro-economics and the difference between countries inside and outside a common currency area into play. It may be very good for Germany to run high, i.e. above 6% current account balances over many years (this is also disputable!!), but for the Eurozone as a whole, and also the world, this amounts to a “beggar-thy-neighbor” policy, where Germany (and others, including Austria) have reduced their own unit labor costs relative to their competitors, and thus manage to produce more than they consume and invest. In this case Germany gains market share at the expense of its partners in the Eurozone and, at the same time, contributes to reducing total demand in the Eurozone relative to a more balanced situation.

What this means is that Germany, and the Eurozone, as targets of their economic policy, insist on being “internationally competitive”, but by doing that ignore the massive possibilities of directing their production to their own indigenous demand. Concretely, Germany and the EU, rather bank on exports to the outside world, than to increase local, indigenous, demand  – a potential of 300 (EZ) or 500 (EU) citizens.

A simple example: if Germany did not insist on reducing its unit labor costs relative to its “competitors” or partners, but attempted to increase effective demand in Germany, Germans would consume and invest more and would increase total demand for the Eurozone. Instead, EU and German policy attempts to make German/EZ labor markets “more flexible”, increase competition for goods and services as its major “growth strategy”. Some of the inflexibilities in EZ countries may well be too rigid, but the EZ will escape the threat of deflation only if total demand is increased in a sustainable manner. That means – among other things – higher wages and more investment in the surplus countries and thus more security that the crisis can be overcome.


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Filed under Crisis Response, European Union, Fiscal Policy

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