Like clockwork, someone in the mainstream regularly pummels Germany for producing more than it consumes and for running a less insensible government fiscal policy than that of most other states. Recently I commented on the tag-team laments of Ben Bernanke and John Mauldin on this topic; today it is Ambrose Evans-Pritchard.
As I must do on this topic or any other macro-economic topic, I offer a caveat; macro-economics as currently practiced in the mainstream is nonsensical. The data aggregates are nonsense and the practice is nonsense. Even the idea of a trade deficit is nonsense.
Specifically regarding this worrisome trade deficit: if I, as an individual, produce more than I consume I am considered a productive member of society (at least I think this view is still generally held). If I and all of my neighbors who reside within an arbitrary line on a map produce more than we consume, it is considered a disaster. It takes a Ph.D. to come to this conclusion.
With that caveat out of the way, let’s look at the laments of Ambrose:
Germany’s current account surplus is out of control.
Why should it be “in” control? What does “control” even mean? Like saying I should be only a little productive, but not too much; I should save only a little, but not too much; I should have little available for investment – not too much. Of course, there is also the question: who should control it? Macro-economic policy recommendations in today’s world require force.
Germany must be punished according to AEP; yet, he laments the weakness of the current punishment mechanism:
…cynics might justifiably conclude that big countries play by their own rules in Europe…
Instead big countries should play by the rules of a higher level of political authority:
The EMU punishment machinery is highly political, in any case.
Every political “punishment machinery” is “highly political,” in every case. Why would the EMU punishment machinery be any different? What does Ambrose expect? You want non-political punishment machinery? Try the free market – it is your only option. But then what would Ambrose (and virtually every macro-economist) do for a living?
It isn’t merely that Germany is naughty; it is abusive – like wife-beating or something:
Germany’s surplus is not caused by a one-off shock…. It is a chronic structural abuse….
They aren’t even shy about using violence to deal with the situation; Germany should be punched. Don’t believe me?
“The European Commission should stop pulling its punches: Germany should be fined,” said Simon Tilford, from the Centre for European Reform.
Since Germany is being abusive, such a punch could be considered an act of coming to the defense of another…I guess. For some reason, I do not believe that the NAP is at the root of the thinking here.
For Ambrose, the root of the problem appears to be that Germany presciently went through a significant labor restructuring more than a decade ago – wage freezes, wage reductions, more liberal work rules, etc.:
This was achieved by squeezing wages in the early years of EMU, undercutting the South.
The solution seems simple enough: wages and work rules in other European countries can be similarly reduced and liberalized. Apparently, this solution is – for some reason – not possible today; it might cause…well, wait – let Ambrose tell you:
Efforts by France, Spain, Italy, Portugal and Greece (super-competitive Ireland is irrelevant to this debate) to claw back lost ground by doing the same at this late stage is precisely what pushed the EMU system as a whole into a quasi-deflationary slump from 2011 to 2014.
Deflation – the bogeyman of falling prices. Someday, when the refining fire of the coming calamity has cleansed the world of nonsensical macro-economic thinking, people might once again discover the wonders that accrue in a world of falling prices (and bankruptcies).
Instead of falling prices throughout Europe, the German government should spend:
Berlin has refused to offset anemic demand with extra government spending.
Why not say “Paris has refused to liberalize labor regulations”? Spend, spend, and spend some more. For a macro-economist, the answer to almost every question: spend.
Finally, Ambrose comes to the bridge that must be either crossed or burned:
German surpluses did not matter in the days of the D-Mark. The country revalued from time to time, correcting the problem. How Germany ran its own internal affairs were largely its own business. But as the IMF has repeatedly stated, it is an entirely different matter in a monetary union. The German surplus lies at the root of EMU’s North-South divide.
Either all EMU nations join into a fiscal union, or the EMU comes apart. These aren’t the only two possibilities – government bureaucrats could just allow market forces via bankruptcies and restructuring to do their Godly work. So far, they are quite unwilling to allow this – at least when it comes to banks and sovereigns.
In the meantime, the solution is force:
…the eurozone can order Germany to present an “action plan” to cut the surplus. If that fails, EU ministers then sit in judgment on Germany. They can force Berlin to pay a deposit of up to 0.1pc of GDP (€2.4bn) into a special account…
“…order…sit in judgement…force….” Well, this comes with some risk:
Needless to say, any such sanction would cause outrage in the Bundestag and risk destroying German political consent for the euro.
If this comes to pass, that will be a glorious day of deliverance.
Ambrose concludes with a chastisement:
The sooner Germany abandons fiscal fetishism and invests its own money in its own country for its own good, the better it will be for everybody.
There is a good strategy – the British telling the Germans what is good for them. How many times has that worked well in history?
One of many follies of mainstream macro-economics: there is no rational (meaning properly constructed) bridge that connects micro-economics to macro-economics. The macro policy recommendations are almost always exactly the opposite of that which makes sense for the individual.
On what planet is this considered sensible? Unfortunately for all of us, this one.
But it won’t last for long. Then people like Ambrose will have to restructure their own wages and work rules. Maybe this is why they fear deflation!