Just a quick note. The two largest surplus economies have lately decided to take radically different paths. China expressed concern for the imbalances lying behind its large current account surplus, and pledged since at least 2009 to re-balance its growth model towards higher domestic demand. I had already discussed that a little more than one year ago, noticing how the challenge for China was to steer away not only from exports, but also from excessive investment. In the same piece I had argued that while China seemed fully conscious of its contribution to the global imbalances that had led to the crisis, Germany had decided to walk the opposite path.
And here we are. With timely synchronization, we learn that wages in Bavaria will increase by 5.6% over the next two years, maybe triggering a more generalized increase. Or maybe not. While in China they increased 17% in the year 2012.
Even taking into account differences in inflation and in growth, the difference is revealing. China is actually playing the game it committed to. Not only it tries to reduce its dependence on foreign demand; but, domestically, it is trying to boost consumption and to curb investment.
In the meantime Germany is stuck with its small-country syndrome: export-led growth and restraints to domestic demand (both public and private). In spite of recent troubles, austerity remains the course Europe is following (with disastrous results). It is telling that even when partially acknowledging that austerity did not bring the fruits she hoped for, Angela Merkel can only suggest, as an alternative, structural reforms to boost competitiveness. Expanding domestic demand has not, is not, and will not be an option for the German government.
The Berlin View is alive and kicking.
Update: just a link to Wolfgang Munchau, who seems to make a similar argument.
Austerity partisans had a couple of rough weeks, with highlights such as the Reinhart and Rogoff blunder, and Mr Barroso’s acknowledgement that the European periphery suffers from austerity fatigue.
In spite of the media trumpeting it all over the place, and proclaiming the end of the austerity war, it is hard to believe that eurozone austerity will be softened. Sure, peripheral countries will obtain some (much needed) breathing space. But this is neither a necessary nor a sufficient condition for a significant policy reversal in the EMU.
Last week I had a short interview with France 24 in which I tried to squeeze in just a few minutes the contrast between the global imbalances view and the Berlin view.
Not that he needs it, but I feel I must advertise this New York Times editorial by Paul Krugman, on the looming European catastrophe. As usual, it is masterly written. I just want to add one remark: The economic suicide of Europe happens because of ideological blindness. We are trapped in a doctrinal approach to economics and economic policy. There is nothing you can do against fundamentalism.
Should the title of this blog change from Gloomy to Desperate?
Martin Wolf has a very interesting piece on China’s attempt to rebalance its growth model from exports to domestic demand. Wolf remarkably shows how this attempt has been going on for at least a decade, with unequal pace, and several stop-and-go. I’d add that the crisis itself played a contradictory role. China on one side was one of the first countries in 2009 to implement a robust stimulus plan amounting to more than 10% of GDP; on the other, it did not resist (as most countries) more or less hidden protectionist measures and currency manipulation. Wolf concludes that, while successful, the rebalancing from external to domestic demand led to excessive (and not necessarily productive) investment. The new rebalancing challenge of China lies in increasing income and consumption of its population.
What I take from this is that China fully grasps its new role in the world economy. Its leadership understood long ago that the transition from developing/emerging economy to fully developed economy needed to pass among other things through less dependence on exports. A large dynamic economy cannot rely on growth in the rest of the world for its prosperity. Even the debate on reforming the welfare state and on health care had as one of his reasons the necessity to reduce precautionary savings. The rebalancing act is long and unsteady, but definitively under way.
It is also worth noticing that a better balance between domestic and external demand in the large economies is crucial element in reducing the macroeconomic fragility of the world economy through decreasing trade imbalances.
It is striking, in contrast, how Europe remains trapped in a sort of small country syndrome. The “Berlin View” permeating the Fiscal Compact advocates fiscal discipline and domestic demand compression, in order to improve competitiveness and to foster export-led growth. Besides the fact that it is not working, this is equivalent to tying Europe’s fate to the performance of the rest of the world, giving up the ambition of being a major player in the world economic arena. What a difference with the ambition and the forward looking attitude of China…
I am preparing a class on the crisis, and for the first time I have put together in a single place the actual numbers that I discussed sparsely in the past. Taken all together, they are even scarier. So scary, that I want to share them.