Trade surpluses and the single currency

German trade surpluses are making once again the headlines. The European Commission decided yesterday to launch an investigation into Berlin’s “excessive” trade surplus. This surplus is so large, the Commission argues, that it saps the strength of the Eurozone economic balance (or, put differently, nurtures its imbalances). This decision seems to have taken many by surprise. The French newspaper Le Monde interpreted the Commission’s decision as an attempt to “punish Berlin and flatter the dunces.” The BBC asks whether Brussels wants to “punish German success?” Another reason why this caught many by surprise was probably the actual discovery that the European Commission had the competence to launch such an investigation.

If the Commission is indeed exercising a “new power,” this new power is however far from reflecting a new concern. The International Monetary Fund has already made similar points, namely, that the German government should boost its internal demand and that wages should be raised in order to help other Eurozone countries. The United States repeatedly raised similar arguments with China. Even at a time when the euro did not exist, trade surpluses and deficits were already a significant preoccupation. Harold James has recently shown how Germany’s relations with its European neighbours were indeed more harmonious when Germany did not have substantial current account surpluses (and instead had deficits), as occurred in the 1990s.  Back in the 1960s and 1970s, trade surpluses and deficits could indeed severely impact on the exchange rate of a currency. And because EU member states were intensively trading with each other, important and sudden currency fluctuations were not particularly welcome, to say the least (also because they impacted the running of the common agricultural policy).

But what was then done to offset these imbalances? The strong currency countries continuously argued that weak currency countries – chiefly France and Italy – should orient their economies towards increasing their exports (in contemporary parlance, this would read “restore their competitiveness”). And weak currency countries were criticising strong currency countries – chiefly Germany – for having large trade surpluses that were increasing the value of the Deutsche Mark and thus making it impossible for weak currency countries to keep up with the ever-increasing value of their neighbour’s currency. The sharing of a common monetary system – the snake, or the European Monetary Sytem (EMS) – indeed forced currencies to remain within limited bands of fluctuation.

In the run-up to the creation of the EMS, the European Commission hoped that such a tighter monetary arrangement could go hand in hand with greater harmony in the economic policies of the EMS participants. The European Commission advanced the idea of putting in place “quantitative growth targets,” namely, clearly defined growth objectives for each EEC member state. Such objectives, if respected, would guarantee a more harmonious economic development of the EMS-area. This strategy had however one obvious aim: to encourage Germany to boost its internal demand, so as to rebalance the economic development of the EEC, and help those countries – France, Italy, Ireland – that were faring less well. Criticising German economic “success,” and in particular arguing that it may have harmful consequences on its European neighbours, is therefore hardly a new feature.

Nor has this concern been confined to the European level. If the US and the IMF point today at German and Chinese trade surpluses, the so-called locomotive theory debate that emerged in the 1970s had very similar aspects. According to this theory, increased economic growth in surplus countries (chiefly Germany, and, to a lesser extent, Japan) would nurture international consumption and thereby rebalance international economic development (and chiefly help the US economy). The G7 Bonn summit, in 1978, witnessed an intense discussion around this idea, and Germany agreed to a stimulus that would amount to 1% of GNP (although it never really put that into practice).

The significant obvious difference with today’s situation in the Eurozone is that these countries now share a single currency, instead of being member of a common exchange rate system. As a consequence the surplus or the deficit of a trade balance does not have the same apparent and immediate consequence – bringing down or up the value of a specific currency, and thereby risking that this currency may go beyond the exchange rate system’s upper or lower fluctuation band – as it was before the introduction of the euro. This important difference however does not prevent the Commission’s decision on Wednesday from still having an internal logic, namely, that of trying to even out the economic development of the different members of the single currency. True, this takes here a rather strange form, and consists of investigating into the making of what seems to be a success story. Yet the underlying logic is that part of this success story may be done at the expense of others.

The recent and ongoing unrest in the French pork industry is one such good example. Two countries sharing a single currency and having a similar industrial activity have different economic and social systems. To simplify, one has a minimum salary, while the other has no such minimum salary, which then gives it a competitive benefit. The French government has thus accused the German government of “wage dumping.” Similar examples can be found in the repeated criticisms made against the low rate of the Irish corporate tax. This led to accusations of “fiscal dumping.” In starting an enquiry into the German trade surplus, the European Commission will be looking at the various causes of this surplus. The only causes that should be seen as problematic in the context of the Eurozone are those that indicate unfair competition – and would bring the whole discussion back to the question as to whether or not the Eurozone forms a genuine single market fit for sharing a single currency. A worthwhile discussion that is unfortunately for the moment largely hidden by the oddity of possibly “punishing” the Eurozone’s most successful economy.

(Picture: (c) E. Mourlon-Druol)

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