“What Trump Gets Right About Europe” sounds like an April Fool’s piece from the New York Times (e.g., it would be a blank screen), but in fact is authored by a German in a serious mood:
Mr. Trump’s anger at America’s allies embodies, however unpleasantly, a not unreasonable point of view, and one that the rest of the world ignores at its peril: The global world order is unbalanced and inequitable. And unless something is done to correct it soon, it will collapse, with or without the president’s tweets.
The Europeans have basically been free riders on the voyage, spending almost nothing on defense, and instead building vast social welfare systems at home and robust, well-protected export industries abroad. Rather than lash back at Mr. Trump, they would do better to ask how we got to this place, and how to get out.
The European Union, as an institution, is one of the prime drivers of this inequity. At the Group of 7, for example, the constituent countries are described as all equals. But in reality, the union puts a thumb on the scales in its members’ favor: It is a highly integrated, well-protected free-trade area that gives a huge leg up to, say, German car manufacturers while essentially punishing American companies who want to trade in the region.
Here’s where I get lost:
The eurozone offers a similar unfair advantage. If it were not for the euro, Germany would long ago have had to appreciate its currency in line with its enormous export surplus.
Sure, eurozone membership makes imports to Germany more expensive than they would be under the deutschemark; wage restraint has also helped maintain the competitiveness of German machinery. But how can the very same politicians and journalists who defended the euro bailout payments during the financial crisis, arguing that Germany profited disproportionately from the common currency, now go berserk when Mr. Trump makes exactly this point?
Suppose that the medium of exchange in Europe were gold doubloons or simply gold. Wouldn’t the distribution of manufacturing and wealth among European countries be pretty similar to what it is today? If so, why blame the exotic euro? If not… maybe someone can explain it below. And also explain how this would be different than what happens among U.S. states, which can vary dramatically in wealth or manufacturing output.
Related:
- “Fall of the American Empire,” a piece by Paul Krugman that appeared on the same day as the above article, but making pretty much the opposite points
All countries that use the Euro as their currency have to move in lockstep, financially. Germany benefits from this, sucking the life out of the poorer southern Euro countries.
Since the value of the EUR vs other currencies reflects the economic conditions of the Eurozone as a whole, it is valued much less than a German national currency (like the Deustsche Mark). This provides an advantage to Germany in exports. If the EUR were not there and Germany had Deutsche Marks, the value of Deutsche Marks would be much higher making german exports less competitive.
However this is in effect German industry benefitting from a lower EUR at the expense of the German taxpayer who will finally bail out the EU basketcases made of Portugal, Spain, Greece and Italy.
The difference with US states is that there is much greater labor mobility from Alabama to e.g Georgia than there is from Greece to Germany at least that’s the textbook view. Google exchange rate trilemma.
Three things…
(1) No country should want free or fair trade; countries should seek out trade arrangements that benefits their national interest.
(2) A trade arrangement where you buy substantially more from others than you sell to others perpetuate an outflow of wealth from your nation to your trading partners. That is not in your national interest.
(3) The objective of trade negotiations should not be to minimize barriers, lower consumer goods prices or maximize trade volume. It should be bring wealth into your country, or at the minimum, to prevent it leeching abroad.
For a developed and affluent country, unrestricted trade is SUICIDE. True free trade means that countries whose work force makes 1/10th of your wages makes everything while you import everything. It means that your lose your industries and they build build great cities. It means that they get richer while you get poorer. It means that they WIN and you LOSE. True free trade also does not exist. Our “leaders” and government have not acted in good faith over the last 70 years… they have negotiated deals that benefit their multinational corporate donors not our national interests… they have negotiated deals where other countries are allowed to tax our stuff much more than we tax theirs… where other countries are allowed to ban our stuff while we don’t ban theirs… they have negotiated the outflow of a trillion AMERICAN dollars yearly due to trade deficits. That’s the kind of agreements you sign when enemy tanks are on the capitol lawn, and they have been signing them for years.
An example of “free” trade that the USA benefited from is during WWII. We exported so much to help the European allies to win the war. After that, the USA started paying out of pocket to keep the world “safe”.
Let’s say tomorrow Germany and Greece both withdraw from the Euro and on day one the exchange rate is set at 1 Euro = 1 New Deutsche mark = 1 New Drachma. What would happen over time is that after a while because of Greek inflationary policies (the government prints a lot more Drachmas than it collects in taxes) ,it would take 2 Drachmas to buy 1 Euro. Meanwhile, after a while you’d have to pay 2 Euros to buy a DM because there’s high demand for DMs, which people need to buy (directly or indirectly) if they want to buy a Mercedes. So after a while, a Mercedes would cost 4x as much as it does now in Drachmas (leading Greeks to buy a lot fewer Drachmas) and Greek vacations would cost a lot less for Germans. But as long as they both use Euros, Greece doesn’t get hurt by its spendthrift ways. This helps German manufacturers and hurts German consumers (who have to overpay for Greek olive oil, vacations, etc.) and it hurts Greek manufacturers (once Mercedes became really expensive Greek consumers would turn to Greek made donkey carts).
I still don’t get it! I asked “Suppose that the medium of exchange in Europe were gold doubloons or simply gold. Wouldn’t the distribution of manufacturing and wealth among European countries be pretty similar to what it is today?”
I haven’t seen an answer to this specific question.
Jack: I appreciate your concrete example of what happens when there are multiple currencies that can float against each other. But there WERE multiple currencies in Europe years ago and Germany was way richer and more prone to manufacturing than was Greece. Assuming that Greece is somehow prevented from printing Euros, how are Euros actually different than gold doubloons from a Greek point of view? Over time, why can’t Germany just get richer from paying higher salaries and earning greater dividends in Euros, reflecting their successful economy? And the Greeks, if they don’t work as hard or as effectively, would see lower or flat salaries and dividends?
Dwight: “For a developed and affluent country, unrestricted trade is SUICIDE.” There are significant cost-of-living and wage differences among U.S. states (see http://time.com/money/5177566/average-income-every-state-real-value/ ). And there are no tariff or non-tariff restrictions on trade among them. Are states committing economic suicide when they trade with a state where labor is cheaper? Circling back to the original post, if you’re argument is correct then Germany should actually be a LOSER under the current EU system because Germany is exposed to unrestricted trade with much poorer countries within the EU. See http://www.aalep.eu/richest-and-poorest-eu-countries for the distribution.
> I haven’t seen an answer to this specific question.
> Suppose that the medium of exchange in Europe were gold doubloons or simply gold.
> …
Your question presumes that the countries share a currency. Under that assumption, you are correct. If they have a common currency, then it does not matter if the common currency is Euros or Gold or anything else.
The interesting case for policy is: what if Germany and Greece have different currencies with a floating exchange rate?
W pretty much answered the question.
When differences in currencies cannot balance the books, something else does the balancing. In this case, the something else was national debt bonds, which vary from country to country. Think of them as a higher number M that can be differentiated across national economies, unlike thr universal currency of the Euro, which accounts for the lower number M accounts.
To use an atmospheric analogy, when you have two colliding pressure fronts, you will get turbulence at some altitude, even if ground winds are calm.
Corindel and Mememe: I don’t see how the Germans would be worse off overall if things went back to the pre-euro system. The Germans are getting unearned wealth somehow supposedly from this common currency. In a multi-currency pre-euro world the Greeks would still have to exchange something tangible of value, ultimately, in order to get a German-built Mercedes. W’s idea that this is a way to force one group of Germans to subsidize another group makes more sense than Germany overall is getting crazy rich from the use of the euro as opposed to what they would have gotten via the use of multiple currencies.
Having multiple countries using the Euro as currency makes it impossible for these countries to compete with Germany by devaluing their currencies and making their exports cheaper. That means they have to compete by improving the quality of their products, which is much more difficult. Using the Euro also keeps the price of German products stable in countries that use the Euro, helping cement the advantage enjoyed by German exporters.
Wazoo: why can’t they make their exports cheaper by putting a lower euro price on them? The only advantage that I can see of devaluation is that you don’t have to deliver the bad news to people back home and you can also steal from savers (but that’s only temporary).
What’s the point of the question? The point of the Euro is to maintain DE as an export driven economy today under a globalized setting: they get an economy of scale and a big internal market – without the Euro they would have to appreciate the DM so that production of stuff would shift to Spain Italy and Greece where it would make more sense because wages in DE would be too high. Spain and Italy get to benefit fiscally from the deal at the expense of their industries – after all its a deal and not conquest.
Philg: I was not addressing the question of whether Germany was better off, just how different currency regimes balanced trade imbalances differently. We both think W has the right idea.
One thing to consider is that currency and trade regimes tend to take a long time to change, while actual economic and political realities can change really fast. In the ten years it takes to consider and implement systemic change, the circumstances that suggest that change have themselves transformed. Also, systemic change can work unexpectedly, causing new problems that are hard to fix without systemic change.
In brief: political economic regimes are sticky, the forces they channel are not.