International asymmetries redux
Using the very different examples of China and Germany, both of which are export dominated and have current-account surpluses, Bruegel Director Jean Pisani-Ferry examines the debate on crisis recovery which is dominated by asymmetries between countries. The US has accused China or manipulating its currency and within the EU, the French Economy Minister has asked […]
Using the very different examples of China and Germany, both of which are export dominated and have current-account surpluses, Bruegel Director Jean Pisani-Ferry examines the debate on crisis recovery which is dominated by asymmetries between countries. The US has accused China or manipulating its currency and within the EU, the French Economy Minister has asked Germany to do more to stimulate domestic demand and reduce its current account surplus. This article questions how growth will be rebalanced from deficit countries being the traditional drivers of demand to surplus countries having to boost domestic demand and the accompanying shift in relative competitiveness on account of this role reversal.
On 15 April the US treasury was scheduled to tell Congress whether or not it deems China to be manipulating its currency. It has now postponed the release of its report but without bothering to wait, 130 congressmen went ahead on 15 March, accused China of ‘permanent manipulation’ and called for countervailing duties as a prelude to a formal WTO complaint. On the same day in the Financial Times, French Economy Minister Christine Lagarde suggested politely but unequivocally that Berlin should make an effort to stimulate domestic demand and reduce its current-account surplus.
There is a limit to this comparison. True, China and Germany are ranked global one and two for exports and current-account surpluses, but the two countries cannot simply be lumped together. In China’s case it is straightforward to point to distortions behind the surplus: resistance to the appreciation of the renminbi, implicit subsidies to industry, excess saving by state enterprises, inadequate social security causing households to save for old-age insurance purposes. But Germany’s case is not the same. The debate about Germany’s surplus and the deficits of its partners is a legitimate – and necessary – one, but it does not involve the same kind of arguments as those being used between Beijing and Washington.
That said, the fact remains that the ongoing debate about current-account surpluses and deficits bears witness to a sea-change in international economic debate. Whereas last year the priority was to define a common response to the crisis, the recovery is today triggering a focus on asymmetries between countries. In a few days’ time, discussion on rebalancing within the G20 will enter an active phase as the IMF holds its spring meeting. This discussion is likely to dominate throughout 2010.
The issue is simple. While the countries with a deficit – the US, UK, Spain, central Europe – have been the drivers of demand over the past decade, they have for the most part now switched from being the engines to being the brakes on demand. Rebalancing of growth will require an inversion of roles, in other words a boost in domestic demand in surplus countries and in consequence a shift in relative competiveness. Will this switch take place both at global and at European level? Paradoxically, there is more reason for optimism in the first case than in the second.
On the back of major recovery programmes and given the pick-up in international trade, China and emerging Asia, including India, are seeing a strong upturn which contrasts starkly with the flabbiness of the advanced economies of Europe, the US and Japan. While in the first group of countries the issue is the risk of overheating, for the second group the upturn has not resulted in a sustained surge and unemployment continues to rise. In light of this major misfire, maintaining a fixed parity between the renmini and the dollar is causing as many problems to China as it is to the US: it is fueling inflation and hampering macroeconomic management. In spite of political resistance to pressure from Washington and to lobbying from exporting regions, it is likely that the Chinese government will end up bowing to the facts and see that a rethink of exchange-rate policy is in China’s own interest.
Things are considerably more complicated in Europe, for two reasons. The first is, evidently, that Germany and the rest of the euro area share the same currency and that rebalancing relative
competitiveness therefore means a higher inflation rate in Germany than in partner countries for a number of years. The very suggestion of this horrifies the Germans, who immediately point out that increases in prices and wages cannot be decided by fiat. The second reason is that, unlike China, Germany does not face the risk of overheating. It suffered a huge recessionary jolt during the crisis, whose impact is still far from absorbed. As Germany remains one of the countries with the highest labour costs, firms and workers too continue to put the preservation of competitiveness above all other considerations.
So the bitter tone of the debate should not obscure the underlying reality: managing asymmetries is tricky everywhere, but the adjustment of relative competitiveness could ironically prove to be more of an uphill struggle in Europe than at the global level.
This op-ed has also been published in the Chinese Century Weekly and the German publication Handelsbaltt.
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