Keeping the show on the road became the G20′s main achievement at the acrimonious Seoul summit in November. But if you have to keep pedaling to stop the global trade imbalances bicycle from toppling, a new speech by Andy Haldane of the Bank of England demonstrates that the road ahead is uphill.
It is difficult to say much fresh about trade imbalances. Everyone knows they are big; they are a threat to the global economy; they played a part in the recent crisis; and countries fundamentally disagree over who is responsible for their existence and who should change policies to reduce their threat.
But Mr Haldane has an interesting stab at the subject, showing he has ambitions extending considerably outside his current responsibility for financial stability.
As a current account deficit must, by definition, also represent a situation where investment is greater than savings (and vice versa), he
In September 2009 I blogged about the similarities between the Pittsburgh G20 framework for strong, stable and balanced global growth and the 2007 International Monetary Fund multilateral consultations, noting that when global leaders were wrong to say their commitments to get rid of imbalances were new or made significant progress.
Today it is genuinely déjà vu all over again as the “Seoul Action Plan” papers over long-standing divisions on currencies and trade imbalances. Leaders have been doing their best to say the summit was not a failure and that the engine of global economic cooperation is still firing on all cylinders.
What is the evidence? According to the G20 it is this new passage about indicative guidelines in the communique.
There are two massive fixed exchange rate blocs operating in the world economy today, and both of them face severe strains and conflicts. The eurozone is beset by problems which are typical of fixed rate blocs in the past, with the main surplus country (Germany) refusing to increase aggregate demand, thus forcing the deficit countries to reduce demand in order to stay within the currency arrangement. This, they appear willing to do, or at least to try.
Meanwhile, the China/US bloc also has a (nearly) fixed exchange rate, and once again the surplus country (China) is refusing, or is unable, to expand domestic demand enough to eliminate the trade imbalance. But, in this case, the deficit country (the US) is increasingly unwilling to accept the consequences, and is adopting policies which are designed to break up the bloc altogether. Two blocs with somewhat similar problems, but very different responses and outcomes for the deficit countries.
In making this analogy, it is of course important to accept that the institutional arrangements surrounding the world’s two major blocs could hardly be more different, with the eurozone established as a single currency area, while the Sino/US bloc is officially a linked but flexible exchange rate area. But the critical feature of both areas is that nominal exchange rate adjustments are not permitted to equilibrate trade imbalances within either of the two blocs, so a persistent pattern of large current account imbalances has emerged. Germany and China are the two economies where chronic surpluses have emerged, while the Club Med economies and the US have the corresponding chronic deficits.
Stephanie Flanders reminds us that it takes two to tango in her latest blog post. The story concerns proposals that might fine euro members for failing to keep public finances within certain boundaries. Over to Ms Flanders:
There would be fines in the region of 0.2% of GDP for countries who borrow too much, and also smaller financial penalties for countries that don’t try hard enough to improve their competitiveness.
I’m told that competitiveness would be measured by a “persistent current account imbalance”. But as this blog has pointed out many times, it takes two to create a current account gap: if one country has a deficit, someone else must have a surplus.
In fact, all the signs are that the new system will have the same asymmetry that we see in the global economy more generally. Countries with deficits are pressured to reform, but the countries with surpluses are under no pressure to change their policies at all.
Somewhat as predicted, or at least predicted by me, Tim Geithner went as far as he could go in suggesting that various options were on the table for trying to push the Chinese into letting the exchange rate rise without giving any hostages to fortune.
The Murphy-Ryan bill (similar to Schumer-Graham in the Senate) got respectful attention and the possibility of support, though no commitment. Naming China as a currency manipulator, though, seems still to be off the table.
“A strengthening in the fiscal balance by 1 percentage point of GDP is, on average, associated with a current account improvement of 0.2–0.3 percentage points of GDP.” This is the conclusion from a top notch set of researchers, posted on VoxEU.
With renewed focus on global trade imbalances, this may be of interest to policymakers currently looking at exchange rates. The finding holds across emerging and developed economies, though the “association is significantly higher when output is above potential.” Food for thought.
When Wolfgang Schäuble, Germany’s finance minister, next meets his European counterparts, will he be heaped with praise – or brickbats? Germany’s economy is on a roll. It grew by 2.2 per cent in the three months to June, its best quarterly performance since reunification in 1990. But that has not necessarily gone down well with colleagues in other European capitals.
Unnoticed beyond his tiny country’s borders, Jean-Claude Juncker, Luxembourg’s prime minister, earlier this month launched an extraordinary attack on German economic policy, according to the Luxemburger Wort. Germany’s success was based on “wage and social dumping,” Mr Juncker is reported as having said. “The way Germany went about improving its competitiveness, I would not like to see in our country.” Since the launch of the euro in 1999, German workers had seen a meagre 12 per cent rise in wages, whereas his countrymen saw a 41 per cent rise, he went on.
For those following the saga:
Last week, Martin Wolf wrote a column on the fable of the grasshopper and the ants as an allegory to import-surplus and export-surplus countries. The new moral: don’t be an ant.
Evidence is growing that the European Central Bank sees the euro’s weakness positively. Christian Noyer, governor of the Banque de France – who always chooses his words carefully – has just told French TV that the currency is now trading at a “more normal” level. “Certainly, we are benefiting from it in terms of exports,” he added.
Earlier, Ewald Nowotny, Austria’s central bank governor, had told a news conference in Vienna that the euro’s fall would be welcomed by industry (although Mr Nowotny added: “We’ll have to see how long this development will be seen as acceptable by the US.”)
A 15 per cent appreciation of the renminbi would reduce the American trade deficit by just 5 per cent by the end of next year, and the effects would not significantly increase GDP.