19/11/2013- Kemal Derviş, former Minister of Economic Affairs of Turkey and former
Administrator of the United Nations Development Program (UNDP), is Vice
President for the Global Economy at the Brookings Institution.
MADRID – In recent years, China’s current-account surpluses – which have averaged
almost $220 billion annually since 2000 – have attracted much criticism from the
rest of the world. But Germany’s similar-size surpluses – which have averaged about
$170 billion since the euro’s introduction in 1999 – have, until recently, largely
escaped scrutiny.
The difference, it was argued, was monetary union. So long as the eurozone as a
whole was relatively balanced, Germany’s surpluses were considered irrelevant – just
as, say, Texas’s surpluses have never been considered an issue in the United States.
Chinese surpluses, by contrast, were seen as a cause of global imbalances.
This argument is correct in the sense that it is the current-account surplus or
deficit of a monetary union as a whole that can be expected to have exchange-rate
implications. And, unlike China, Germany no longer has a “national” exchange rate
that can adjust in response to its current-account surplus. These factors – together
with the lack of trade data for regions within countries – have led economists only
rarely to consider countries’ internal surpluses or deficits.
But, in net terms, a region within a country – or, like Germany, a country or
sub-region within a monetary union – still “subtracts” from national and global
aggregate demand if it exports more than it imports. Witness how expenditure cuts by
US state governments – many of which are constitutionally required to balance their
budgets – frustrated, to some degree, America’s massive federal-government stimulus
in 2010-2011.
For this reason, it is relevant to ask whether a country as large as Germany – or
even a large state like California or Texas – augments or depletes global aggregate
demand. (In fact, as sovereign countries, California and Texas would have been the
world’s 12th and 14th largest economies, respectively, in 2012 – ahead of the
Netherlands, Mexico, and South Korea.)
That question is all the more important, because the Netherlands and Austria, two of
Germany’s Northern European eurozone neighbors, continue to run current-account
surpluses, while the Southern European crisis countries have reversed their
previously large deficits, as austerity has squeezed domestic demand and made room
for an increase in exports. As a result, the eurozone as a whole will produce a
surplus close to $260 billion this year, which represents a new global imbalance
that is more directly comparable to China’s in the past decade.
Europe’s non-eurozone surplus countries – Sweden, Denmark, Switzerland, and Norway
(all of which tie their exchange rates to the euro to some degree) – magnify this
global imbalance. Northern Europe – including these four countries and Germany, the
Netherlands, and Austria – is running a massive current-account surplus of about
$550 billion. Meanwhile, China’s surplus is unlikely to exceed $150 billion this
year. In fact, the highest level that China’s annual surplus has ever reached was
around $400 billion in 2007-2008 – when the US was poised to introduce trade
sanctions against the country, because it viewed this imbalance as a threat to the
stability of the US and the world economy.
What is most problematic about the eurozone’s situation is that unemployment in some
of the crisis countries – Spain and Greece – remains above 20%. These countries are
trying to achieve a difficult “internal devaluation” – that is, a reduction in their
domestic unit labor costs relative to the eurozone’s stronger economies – while the
overall eurozone surplus caused by Northern Europe puts upward pressure on the
exchange rate, undermining their competitiveness outside the monetary union.
Spain and Greece have managed to achieve an internal devaluation of about 5% this
year vis-à-vis Germany, but their competitiveness vis-à-vis the US and dollar-linked
countries has not improved, because the euro has appreciated by more than 5% against
the dollar. And, indeed, the euro should appreciate, because the eurozone as a whole
is now running a large current-account surplus.
One can only pity the Southern European countries. They should almost thank the
French for their inability to impose effective austerity measures and thereby still
run a small current-account deficit, which has prevented the eurozone surplus from
becoming even larger.
But an abundance of pity alone will not help. Northern European countries, which
have ample room to increase wages and implement expansionary policies, must do so.
This would directly benefit Northern European citizens themselves, while helping to
keep the euro down and stimulate growth and adjustment in Southern Europe and the
global economy as a whole.
Kemal Derviş, former Minister of Economic Affairs of Turkey and former
Administrator of the United Nations Development Program (UNDP), is Vice
President for the Global Economy at the Brookings Institution.
Copyright: Project Syndicate, 2013
