As you would expect from an editorial room containing Martin Wolf, the Financial Times knows about the need to address trade imbalances There is a ‘fallacy of composition’ around the idea that if a country needs to save, then every country saving is a good idea*. Instead, demand falls, prices fall, you get recession.
Today’s top leader is beautifully titled: “The Burden of German Thrift”, and the point is summarised in one sentence:
if Europe were only to become better at stopping debtor nations from spending excessively and no defter at encouraging parsimonious peoples to consume, the future would be bleak.
They go on to point out that Keynes realised this in 1941. In summary, ‘A scrimping Germany will be a greater burden for the eurozone than spendthrift Greece’. Stephanie Flanders has similarly noticed the flaw in the thinking behind the EMF, the fund that would deal with the problems of Eurozone deficit-sinners:
The biggest problem is that there would be no symmetrical obligations on surplus countries to do their bit for achieving more balanced European growth. Without that kind of symmetry, any such institution could well exacerbate the economic problem it was intended to fix, by putting an even more impossible burden on the periphery without any correspondent obligations on Germany – either to change policy, or to cough up for Club Med.
Paul Krugman recently made a similar observation, callingthe attempt by everyone to be the saver-who-exports ‘competitive devaluation’. He quotes another writer who says:
Latvia’s model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It’s impossible that the whole of the Eurozone will drop wages to increase export income.
Buttonwood this week made a similar point: currencies can’t all depreciate at once (so it seems everyone is taking it in terms). But he notes how we are NOT getting the same reaction to this behavior as in the 1970s. There is no sign of soaring inflation. (Except if you are Simon Ward of Henderson, who is determined to see it happening first. If he is right a lot of people, me included, will have an ostrich-egg-sized pile of yolk on our faces).
The UK seems a long way from dealing with its own imbalances. The pound is down again today. While Lombard Street Research** initially attribute this to weak housing figures from RICS, I wonder if the terrible trade figures are a bigger part of it. Unlike the eurozone, we have the weak currency to help us grow, and so the continual disappointment here must be a worry, particularly for the Conservatives who may be relying more upon exports than the other less cut-happy parties.
As Jeremy Warner says, “just how low does sterling have to go to boost exports?”
Like these bond market experts I don’t think sterling weakness is about nerves about a hung parliament. If so, why is this graph pointing this way?
In fact, if I were a large holder of gilts, my worries would be split between the fiscal incontinence displayed by Brown on occasion, and the Tories’ determination that macro-economic consequences play little part in the timing of cuts. Either of those two being in sole command of the economy could be lousy news …. bring on the hung parliament.
*not many believe Say’s law – that supply always creates demand, so there can’t be the sort of failure of demand that seems to characterise this and many other recessions. Steven Kates at the IEA does, however.
**The stuff from Jamie Dannhauser may cost me more than my FT subscription, but it’s worth it.