10 April 2012

Martin Wolf: Why the Bundesbank is wrong

In late March, Jens Weidmann, president of the Bundesbank, explored the issue [of the role in the crisis of the payments imbalances] in a speech in London, entitled “rebalancing Europe” (view article). Mr Weidmann describes what he calls a “typical German position”. This is that “the deficit countries must adjust. They must address their structural problems. They must reduce domestic demand. They must become more competitive and they must increase their exports.”

What, in this, is the role of the surplus countries? On this, Mr Weidmann is clear: “It is sometimes suggested that rebalancing should be undertaken by ‘meeting in the middle’, that is by making surplus countries such as Germany less competitive. This suggestion implies that the adjustment as such would be shared between deficit and surplus countries. But the question we have to ask ourselves is: ‘where would this take us? ... [H]ow can Europe succeed ... if we ... give up our hard-won competitiveness? To succeed, Europe as a whole has to become more dynamic, more inventive and more productive.”

Alas, these remarks confuse productivity with competitiveness. Yet these are distinct: the US, for example, is more productive, but less competitive, than China. External competitiveness is relative. Moreover, at the global level, the adjustment must also be shared. Mr Weidmann knows this. As he says, “of course, surplus countries will eventually be affected as deficit countries adjust”. The question is by what mechanism.

The external competitiveness of the eurozone depends on the exchange rate. Yet that is not a policy variable. Members can only seek to improve their competitiveness vis a vis one another. That is exactly what Germany did in the 2000s. Now this must be reversed. 

Might such an internal adjustment even occur naturally? Yes, it might. At present, the ECB is pursuing an expansionary policy. At the same time, German banks surely want to lend more at home. A huge lending boom in Germany would be a big help. But suppose that did not happen. Then today’s austerity-blighted eurozone would end up with a prolonged period of weak demand. It might, as a result, generate a large shift in its net exports. For the rest of the world, that would be a beggar-my-neighbour policy, impossible to tolerate in hard times. For the eurozone to pursue such a policy, while asking outsiders to increase their finance of its members in difficulty, via additional resources for the International Monetary Fund, would add insult to injury. The outsiders should just say no. They should insist, instead, that additional support must be predicated on two-sided adjustment inside the zone.

The good news is that agreement is emerging on the role in the crisis of the payments imbalances. The bad news is that the eurozone does not yet agree that competitiveness is necessarily relative. As soon as it does, the route to convalescence will at least be clear, however hard.

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