Who’s Rebalancing

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.

It Ain’t Over ’til It’s Over

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.

Leaks in the Dam?

Interesting things happened this morning. I assisted to one of the presentations of the OECD interim assessment. There is nothing very new in the assessment, that concerning the eurozone, can be summarized as follows

• The outlook remains negative (while the rest of the OECD countries are doing better)
• There is still room for monetary accommodation
• This monetary accommodation may not benefit the countries that need it more, because the transmission mechanism of monetary policy is still not fully working
• The Cyprus incident shows that there is a desperate (this I added) need of a fully fledged banking union
• EMU countries need to continue on the path of fiscal stabilization, even if automatic stabilizers should be allowed to fully play their role, even at the price of missing nominal targets

One Austerity (Should Not) Fit All

The run up to the Italian elections in February is a welcome occasion to come back to the issue of austerity. The debate in Italy was fired by the widely discussed Wolfgang Munchau editorial, blaming Mario Monti for not opposing austerity. In the heat of electoral competition, this unsurprisingly stirred harsh discussions on whether Italy has room for reversing the austerity that ravaged the country. Some commentators got slightly carried away, accusing those opposing austerity of “silliness and falsehood”. I wonder whether they include the IMF chief economist in the bunch… Whatever, this is a minor issue; the way I see it, these discussions totally miss the point.

The Ancient Roots of EU Problems

Il Sole 24 Ore just published an editorial I wrote with Jean-Luc Gaffard, on the structural problems facing the EU. Here is an English (slightly longer and different) version of the piece:

It is hard not to rejoice at the ECB announcement that it would buy, if necessary, an unlimited amount of government bonds. The Outright Monetary Transactions (OMT) program is meant to protect from speculation countries that would otherwise have no choice but to abandon the euro zone, causing the implosion of the single currency. As had to be expected, the mere announcement that the ECB was willing to act (at least partially) as a lender of last resort calmed speculation and spreads came down to more reasonable levels.

Of Old Ideas about Inequality and Growth

Update: An edited version of this piece appeared as a Project Syndicate commentary

A few weeks ago on Project Syndicate Raghuram Rajan offered his view on inequality and growth, thought provoking as usual. His argument can be summarized as follows:

• Inequality increased starting from the 1970s, across the board
• Two different explanations of this increase can be offered: a progressive one, that blames pro-rich policies, and an “alternative” one, that focuses on skill biased technical progress. I do not understand Rajan’s restraint, and as I like symmetry, I will label this alternative view “conservative”.
• Both views agree that inequality led to excessive debt and hence to the crisis.
• According to Rajan, nevertheless, the alternative/conservative view is more apt at explaining what happened to Europe, that remained more egalitarian, but was able to hide the ensuing low growth and competitiveness through the euro and increased debt.
• The exception is Germany where, following the reunification, structural reforms had to be implemented to reduce workers’ protection. This explains why Germany today is so strong in Europe.
• Thus the solution is for Southern Europe to implement structural reforms and accept increased inequality through lower workers’ protection; the alternative is sliding into an “egalitarian decline” like Japan.

The way I see it, there are a number of problems with Rajan’s analysis, and more importantly a fundamental (and unproven) assumption that underlies his argument. Let me start with the problems in his analysis, and then I’ll turn to the core of this piece, i.e. challenging the underlying assumption.

Explaining the Euro Problems in Six Minutes

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.

One Swallow Does not Make a Summer

The Financial Times reports  something interesting: Wolfgang Schäuble, Germany’s Finance minister, apparently is not against wage increases in Germany:

It is fine if wages in Germany currently rise faster than in other EU countries. These wage increases also serve to reduce the imbalances within Europe

Yeah! Finally! Thumbs up! Or not? Let’s see

• The same article says that the remark was probably due to domestic strikes, and not to a change of course on European matters.
• The interview was given the day before an important local election in Schleswig Hostein (lost by the CDU, by the way), and another in North Rhine-Westphalia next week.
• Angela Merkel’s reaction to the French election has been renewed emphasis on fiscal discipline and…
• Angela Merkel’s reaction to the Greek election has been, hum, let me guess: Renewed emphasis on fiscal discipline!

Let’s wait for a few more swallows, before declaring the end of winter…

Filling the Empty Box of Growth

Last week a number of European public figures joined the ranks of those calling for renewed emphasis on growth. The most remarked was Mario Draghi during his audition before the European Parliament; but equally important was the joint statement of Mario Monti and Manuel Barroso. “Growth” seems to be the word of the month, a must in any European leader’s speech.

I will certainly not complain, about this, because both the reduction of unemployment and the sustainability of public finances in the eurozone simply cannot happen in stagnant economies. Nevertheless, once more, there are some reasons for being worried. At a close look, it seems as if the word were an empty box, simple lip service paid to public opinion in order to keep doing business as usual.

The Real Structural Reforms

I just published an editorial on the Italian daily il Corriere Della Sera (in Italian), that summarizes my views on the causes of the crisis and of global imbalances. It is a reprise of one of my first posts, written with Jean-Paul Fitoussi. It is useful to summarize and refresh the argument: