A healthy surplus

Headquarters of the Chamber of industry and commerce in Wiesbaden, Germany (picture Heiko Kubenka)
The limitations of small c conservative economics are laid bare by Peter Oborne in the Observer yesterday in his description of the problems facing the eurozone. (Read the article here.)

Countries such as Greece, Spain and Ireland are in recessions with growing rates of unemployment, particularly among young people. The traditional means of improving national economic competitiveness is to devalue the currency, but that option is ruled out by membership of the euro. Exchange rates among eurozone members are fixed forever. He contrasts the state of the countries in recession with that of Germany, which “has coped well with the recession, has a jobless rate of about 8% and a healthy trade surplus”. If the ECB runs a monetary policy to suit Germany, it will make economic conditions elsewhere in Europe harder.

This is not just an economic worry. Peter Oborne worries that political debate about leaving the euro in the countries in recession is suppressed, but might re-emerge in the face of what he describes as a “massive, deadly and sustained attack on the livelihoods of ordinary working people”. There has been a rise in the far-left vote in Portugal and there are riots on the streets of Athens, for example. (You might marvel at a conservative commentator blaming rioting on anything other than the fecklesness of the rioters themselves. After all, Norman Tebbit’s father didn’t riot.)

But Peter Oborne’s economic understanding is wrong. Devaluing the currency is itself a means of reducing the standard of living of ordinary working people. Imports become more expensive. Devaluation is not pain-free. The blunt truth, as a commentator who writes “you can only defy political and economic reality for so long” ought to realise, is that a country will get relatively poorer if it is relatively less productive. Ireland and Spain devoted too many resources to construction, Greece has sclerotic public services. These are the problems that need to be fixed. The old-fashioned notion of devaluing your way out of trouble only postpones these problems, it does not solve them.

The attraction that EU membership offers to recent former dictatorships such as Spain and Greece is not only a certificate of democratic stability but also an economic framework that will tend to promote discipline and wiser policies, precisely because the short-term easy way out is closed off. Again, one is surprised that a conservative commentator does not appreciate this.

The further point about the survival of the eurozone, and it is a good one, is not about what Greece and Spain will do, but about what Germany will do. But again, Peter Oborne does not understand. It makes no sense to criticise some countries for running trade deficits while congratulating Germany on running a trade surplus. It is not possible for every country to be in surplus. When thinking about the condition of Greece and Spain, one could equally consider Germany’s trade surplus to be unhealthy. This is why it matters what Germany does.

For the future health of the eurozone, it is necessary to think of the eurozone not as a collection of countries but as a system. Policies need to be made for the benefit of the system as a whole. This does not necessarily imply fiscal transfers or bailouts, but it does require macroeconomic coordination. In particular, countries with trade surpluses within the EU such as Germany and the Netherlands need to promote domestic consumption: in a scenario of deficits and surpluses, the surpluses need to be tackled just as much as the deficits. (The same message can be directed to China, when thinking of the global economy, too.)

It is a good question whether the politicians in power in the various member states are capable of thinking in these terms. Their rhetoric about building Europe needs to be matched by the appropriate policies. But what is certain is that Europe’s problems can only be solved by thinking this way. The British conservative (and Conservative) philosophy of rejecting euro membership on principle is a rejection of this idea of supranational macroeconomics altogether, and will only make matters worse and not better.

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