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Competitive Structural Reforms

December 16, 2013 Leave a comment Go to comments

Mario Draghi, in an interview to the Journal du Dimanche, offers an interesting snapshot of his mindset.  He (correctly in my opinion) dismisses euro exit and competitive devaluations as a viable policy choices:

The populist argument that, by leaving the euro, a national economy will instantly benefit from a competitive devaluation, as it did in the good old days, does not hold water. If everybody tries to devalue their currency, nobody benefits.

But in the same (short) interview, he also argues that

We remain just as determined today to ensure price stability and safeguard the integrity of the euro. But the ECB cannot do it all alone. We will not do governments’ work for them. It is up to them to undertake fundamental reforms, support innovation and manage public spending – in short, to come up with new models for growth. […] Taking the example of German growth, that has not come from the reduction of our interest rates (although that will have helped), but rather from the reforms of previous years.

I find it fascinating: Draghi manages to omit that German increased competitiveness mostly came from wage restraint and domestic demand compression, as showed by a current account that went from a deficit to a large surplus over the past decade.  Compression of domestic demand and export-led growth, in the current non-cooperative framework, would mean taking market shares from EMU partners. This is in fact what Germany did so far, and is precisely the same mechanism we saw at work in the 1930s. Wages and prices would today take the place of exchange rates then, but the mechanism, and the likely outcome are the same. Unless…

Draghi probably has in mind a process by which all EMU countries embrace the German export-led model, and export towards the rest of the world. I have already said (here, here, and here) what I think of that.  We are not a small open economy. If we depress our economy there is only so much the rest of the world can do to lift it through exports. And it remains that the second largest economy in the world deserves better than being a parasite on the shoulders of others…

As long as German economists are like the guy I met on TV last week, there is little to be optimist about…

  1. Energia
    December 17, 2013 at 9:27 pm

    >If everybody tries to devalue their currency, nobody benefits.
    But they do benefit if devaluations are staggered instead of simultaneous. As countries gradually exit the Euro, and one by one achieve export-led growth, the early leavers/growers will increase total demand for goods, thus supporting later Euro exiters.

  2. hanno achenbach
    October 7, 2014 at 6:45 pm

    I found your blog by coincidence and then looked at the tv discussion you mention at the end of your post. I’m sorry to say that the German economist’s English and arguments were better than yours although he was easy to dislike for his vanity and smugness. Anyway, it was not an economic discussion, but a moral dispute about minimum wages. As an economist, you cannot dispute that those ill-paid foreign workers gained a sellers’ surplus even at those low wages, otherwise they would have stayed at home.

    Perhaps you should read Joan Robinson (usually considered left-wing, indeed Maoist):

    “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”

  1. December 16, 2013 at 7:06 pm
  2. January 7, 2014 at 8:50 am

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