Saturday, March 9, 2013
Sinnlos, Part II
Just when you thought it might be possible to have a rational discussion about the Eurozone situation that included mainstream German opinion, along comes Hans-Werner Sinn, this time in the company of Akos Valentinyi, to prove that you can’t. Let’s take a look at their latest, and truly clueless, post on VoxEU.
They begin by announcing, “There is a large body of literature on global imbalances. To date, however, little attention has been paid to the imbalances within the EU or the Eurozone...” Yes, why stoop to read Paul Krugman, George Soros, Martin Wolf or any of the thousands of less prominent writers on this topic, who have been fixated on these imbalances from the moment peripheral bond spreads exploded? This keeps our thinking pure.
But let’s not get distracted. Their real point is that they have discovered something new and significant: there are large trade imbalances within Europe, augmented by capital flight! Who could have imagined? And the solution is for the deficit countries to devalue, which they can do either externally (leave the euro) or internally (deflation). Both are difficult-to-impossible. Such a pity.
Perhaps if these worthies (and Sinn is by far the most influential economic voice in Germany) had deigned to read Krugman, Soros, Wolf or one of the others, they might have learned that one country’s deficit is another’s surplus, and that adjustment is necessarily relative. This is a matter of macroeconomic identities, but it appears that Sinn wouldn’t recognize an identity if it were staring at him from a mirror. The point: for the purpose of rebalancing, it doesn’t matter whether peripheral prices go down or German prices go up. If the first is virtually impossibly, then, just maybe, it might make sense to take a look at the second.
In fact, German wage repression, as many have noted, was an important part of the story over the course of the 00's. Because of the Hartz reforms, and cautious wage bargaining in general, German wages remained essentially flat for nearly a decade. This is great for generating a massive trade surplus, but, and here’s that pesky identity, Germany’s surplus within Europe was also the peripheral deficit. Germans could save like crazy from the earnings inflow, which is simultaneously the outflow that forced their trading partners to borrow.
So, if you know a bit about economics and are able to follow an argument like this, you can imagine a third possibility, unmentioned by Sinn and Valentinyi: German could reflate. They could run a looser fiscal policy and pump up domestic demand, drawing in imports from the deficit lands. They could give themselves a big pay raise, and allow their price advantage over the peripherals to erode.
By the way, none of this is about “reducing performance”. In Germany one hears the argument, if others are losing the race, that’s not a reason for you to slow down. By all means, Germany should continue to improve its institutions for investment, innovation and building worker skills. No reasonable person wants their productivity to go down. But the point of all this improvement should be the possibility of living better, not amassing an unsustainable surplus that requires their customers to borrow their way to destitution.