I don’t know why the FT Brussels blog thinks it’s surprising that the Portuguese economy is showing signs of life, or at least non-catastrophe, while the “German growth engine” is slowing down. This shouldn’t be complicated – a current account surplus increases GDP, a deficit reduces it, and globally, current accounts must sum to zero. If the Portuguese – or southern Europe in general – reduce their trade deficit, as the large majority of their trade is within the Eurozone, Germany has to reduce its surplus or else redirect it to extra-European trade. Because the EU is the wealthiest trading bloc on earth, such redirection implies that Euro-exporters need to cut prices. Whether they lose some aggregate demand by cutting volume or by cutting prices is a secondary question.
What is true, however, is that if the trade-deficit states in the Eurozone try to solve their problems by reducing their current accounts, their living standards will fall and so will the trade-surplus states’ GDP. This appears to be precisely what is happening.
So what about that “economic government”, eh? Even the title doesn’t fill me with confidence. It amounts to a clichÃ© of European politics, an old tune favoured by the French foreign ministry (because it rivals the Bretton Woods institutions) and the EU Commission’s ECFIN and internal market directorates (because it offers them more power). This is, at least, the first time I’ve seen any detail about what it is and what it’s meant to do. And all it seems to have to offer is yet more deflation.
Let’s go through this one. The original Stability Pact demanded restrictions on government budgets. The Eurozone states did try hard to implement this and therefore got less of the late 90s boom than other countries did. In the early 2000s recession, France and Germany ran substantial budget deficits and eventually breached the pact. Some other countries, like Ireland, were enjoying a massive property boom and ran budget surpluses. The IMF, ECB, DG ECFIN, etc, couldn’t have been happier.
So, how’s that working out for you? It’s almost as if those eurosclerotic ol’ social democratic finance ministers from the early Bush age had had a point all along!
And the answer is apparently another Stability Pact, just bigger, badder, and more, with balanced budget clauses and a ban on wage settlements being indexed to inflation. To put it another way, you personally are being asked to trust the ECB to put you out of work if prices look like going up. That’s the only way to deal with inflation!
Things the economic government does not cover include – anything about intra-eurozone trade, anything about macro-prudential bank regulation, anything about unemployment, anything about growth. You might think these are some pretty big issues. But the Merkel-Sarkozy paper doesn’t even mention any of the problems that actually happened. There was a massive housing bubble (nothing) fuelled by spectacularly dodgy banking (nothing) recycling a massive trade surplus (nothing) that led to a huge recession (nothing).
Finally, it’s not actually true that southern Europeans don’t work as hard as Germans. Greeks actually put in more hours. It seems fair to say that the differences are not due to Germany’s vast resource wealth. If it’s not land or labour, it must be either capital – the Germans have more and better tools to work with – or entrepreneurship – German companies are better organised. (Look, this isn’t a controversial statement, is it?) It’s rare that you have to bring your own computer, tractor, machine-tool, or whatever to work. It’s rarer that anyone asks you how you think your workplace should be organised.
But for some reason, the only answer anyone is prepared to offer to the failure of half Europe’s management class is that everyone else should take a pay cut.