Martin Wolf says no. For instance:
But Germany can be Germany – an economy with fiscal discipline, feeble domestic demand and a huge export surplus – only because others are not.
To be sure, Greece is unlikely to end up as "like Germany." But in this argument — which I'm seeing pop up in many places — I think there is a slight conflation between absolute and relative market shares.
Say that Portugal, Italy, and Greece were more like Germany, economically speaking that is. Toss in Albania to make the contrast starker. They would have higher productivity and higher output. They would export more. But with their higher wealth, they would import more too. That includes more imports from Germany, most likely. German *net exports* might well decline, as Germans buy more olive oil and high-powered computer software from Albania. But German exports need not decline *on net* (over a longer run of continuing global growth they certainly will not decline) and that should prove good enough for the German model to sustain itself.
No economist thinks that being wealthy is a zero-sum game. "Being like Germany" isn't exactly the same as being wealthy, but the German model succeeds (in large part) because of its high absolute level of exports. "Net exports" is a zero-sum game at any single point in time, but when it comes to secular growth that's also not the variable which matters.
The bottom line is that people are blaming Germany (and China) a bit too much here.
For the time being, net exports might be reasonable for Germany, given the demographics… But that’s not for eternity.
Its amazing how many people don’t understand this. If poor country A gets to be as wealthy as rich country B, rich country B by definition is not poorer. At worst its government won’t be able to push B’s government around as much.
I think this is due to thinking of countries as individual people. If my neighbor gets wealthier and I don’t, I actually could be harmed in tangible ways, he could start outbidding me for things like schools and other services, the police would be more likely to take his side in disputes and so on. But this dynamic, which economists tend to underplay, doesn’t really translate to the international arena.
The relative wealth of countries DOES matter though Ed. Think about the generous terms of trade that a rich nation can extract from a small one. Additionally, in many ways, quality of life is constrained by the consumption of fossil fuels (to keep you warm, to make your plastic products, for transportation, etc), so being able to bid higher on such things compared to your neighbor will absolutely affect your wealth.
I think the point about the EU and Germany (but not China) is that the economic model that is being encouraged for other European nations is to emulate Germany’s export-oriented outlook. All of Europe can’t do this, as exports are a zero-sum game.
Now you raise the valid point that as other European nations become more competitive/productive, Germany will purchase more from them. But what happens if Germany, in response to increased competition from other European nations, goes through another round of wage deflation making products from other nations uncompetitive once again?
As you point out the solution must include the other European nations becoming more productive/competitive. But the solution must also include Germany allowing the other nations to become more productive/competitive, be this through increasing wages to its own employees or becoming more consumer oriented or some other mechanism.
EVERY Euro country can be like Germany:
an economy with fiscal discipline, feeble domestic demand and a huge export [sector] ,
but not
a huge export surplus .
The big quantities of exports is more important than the fact there is a net export surplus (= negative internal investment, no?).
In particular, all of the PIIGS can have far more fiscal discipline, less domestic demand, and more exports. And they all should.
On fiscal discipline, it would be good to remember that private spending is peaceful, voluntary, but gov’t spending is based on involuntary, forced collection of taxes before it is spent (or wasted).
Further, gov’t spending creates much less wealth per Euro spent, than does private, peaceful, agreement based spending.
What is really ridiculous about this line of argument is the idea that, for some countries to be fiscally disciplined, others must be fiscally profligate. It is entirely possible for every budget in the world to be balanced, or even in surplus. Greece cannot justly blame Germany, or banks, or “speculators” for its predicament, although many find it politically expedient to do so.
Mario,
I think I agree with you here, but it should give us pause to consider that similar arguments were made by Southern states in defense of their peculiar institution during the Convention.
Tyler Cowen is a fun guy ‘n all, but I ask you, between a coupla his blogged paragraphs and an in depth Martin Wolf analysis, who you gonna believe?
I think you should also consider inflationary dynamics. The ECB targets Eurozone inflation at around 2%. This normally works out as 0% for Germany and 4-5% for Greece and Ireland. This difference can be attributed to fiscal policy and Germany’s weak domestic demand.
This means that, at least within the Eurozone, Germany is increasing its relative competitiveness compared to other European nations by around 3% per year.
If all Eurozone nations run a balanced fiscal budget, then inflation rates should normalize across the Eurozone. This normalization however will be at 2%, Germany will have inflation of 2%. If we assume that their will be no material effects on the cost of Euros in dollars or yen, then with all budgets balanced, Germany is losing competitiveness at 2% per year compared with when all other countries run deficits. (Same cost of currency, 2% inflation rather than 0% inflation)
I still think that this would be good for the Eurozone and for the German people, but it would decrease absolute German exports relative to what they would have been with Greek deficits.
But the solution must also include Germany allowing the other nations to become more productive/competitive, be this through increasing wages to its own employees or becoming more consumer oriented or some other mechanism.
Germany doesn’t have to “allow” other nations to become either more productive or more competitive. That’s up to them. This game of blaming the successful should really stop now.
It’s important to remember that it isn’t the German government that exports more than it imports — it’s individual German citizens who decide each day what to purchase, what to produce and how much to save.
The residents of the PIIGS should be trying to learn from them.
Craig: Germany doesn’t have to “allow” other nations to become either more productive or more competitive. That’s up to them. This game of blaming the successful should really stop now.
I don’t think anyone is claiming that the PIIGS can sit back and make no efforts to improve their productivity and competitiveness. Rather, the argument is that in addition to adjustments by the PIIGS, there needs to be an adjustment by Germany as well.
The majority of Germany’s export surplus comes from imports by other EU member states. If these other nations are to lower their export deficits, i.e., become more competitive, by definition, Germany will become less competitive (strictly speaking this is true for EU-internal trade only, but since the majority of the trade is EU-internal, this is a fair place to start).
For these other nations to become more productive and competitive, they must become more productive vis a vis Germany. If they attempt to become more productive by wage deflation for instance, Germany could prevent the relative improvement by undertaking a similar program of wage deflation. So in the end, Germany could prevent any other EU nation from becoming more productive and competitive with respect to Germany. So yes, Germany, as some level, needs to “allow” the relative improvements in productivity and competitiveness.
Comments on this entry are closed.