In an earlier piece, I argued that the ‘Club Med crisis’ reflects Eurozone trade imbalances similar in nature to the more serious trade imbalance which exists between the US and China. By definition, the solution to this problem cannot be for all countries to become net exporters like Germany. Rather, what is needed is a rebalancing of trade.
This can best be accomplished though two broad measures. First, like China, Germany must stimulate domestic demand so that domestic consumption and investment rise faster than exports. Secondly, the Eurozone must recognise the need for better economic governance.
The latter should not be about enforcing ‘more fiscal discipline’ on the periphery at the cost of peripheral wages, but rather about giving the ECB a broader remit (growth and employment rather than inflation targeting) and establishing a Federal Budget large enough to redistribute surpluses—just as happens in the United States.
Eurozone Current Account Balances as %GDP
Source: IMF (in Lapavitsas et al, 2009)
Two-thirds of German trade is within the Eurozone, while the Eurozone’s trade with the rest of the world is roughly in balance. The accompanying graph clearly shows Germany’s surplus to be mirrored by the ‘Club Med’ deficit. No devious plot is implied; this situation arises because somebody’s surplus is by definition somebody else’s deficit.
Obviously, small surpluses and deficits are not the problem. Rather, it is when the surpluses and deficits become large and entrenched over many years that action must be taken. Clearly, reform of economic governance is required if the Eurozone is to prosper in the long term. Just as the China-US trade imbalance is best resolved by increasing aggregate demand in China and recycling surpluses rather than by means of expenditure contraction in the US (the cost of which would be further recession), the Eurozone trade imbalance cannot be resolved by inducing recession in the Mediterranean.
#1 by droom on March 20, 2010 - 4:32 pm
Still the question remains, why would teh Nord of Europe solve problems created by a country who has been cheating with false figures the Nord for years. I would say that the problems created by cheating and allowing bad/poor governments (like Greede) to get away with it is a totally different issue than the trade disbalance between the Nord and South of EU. The last is not the cause of the Greece problem, but cheating is the problem: so I support fully Germany and Netherlands by not helping Greede. We should teach the Greeks how to catch fish, not just giving them fish for free!!!
#2 by temple on March 21, 2010 - 12:47 am
This crisis runs deeper than Greek governments reporting false deficites. The eurozone absolutely needs a central mechanism for redistribution. On the same token, member states must be made more competitive. Greek governments simply do not provide an environment for productive businesses. Nepotism must end in Greece.
#3 by George Irvin on March 21, 2010 - 12:15 pm
@temple:
Yes, I agree that the Greek government has cooked the books, that there is nepotism and that deep political reforms are needed. Equally, that the goverment could do much more to improve business efficiency. But the problem of structural trade imbalance is not just about Greece—it’s about the whole of the Eurozone. Equally, it about the international financial markets betting against the euro. As you rightly say, ‘the crisis runs deeper ….’.
#4 by Ronald Gruenebaum on March 23, 2010 - 12:02 am
Sorry, folks, but the redistribution system has been in place since 1958 and it is called EU these days.
Germany is the biggest net payer and Greece is the biggest net recipient.
The debate needs to move on: To the question how the money distributed is best used. Greece has to answer now. For starters, I suggest to do away with the reported 80.000 dead pensioners whose families find nothing wrong with collecting the pension as we speak. It’s all about economic governance, really.
Everything else is a distraction. George, why can’t I buy a Greek-made car and have to stick with those bloody German products?
#5 by connected on March 24, 2010 - 10:44 am
Thank you for this article, and your piece on The Guardian, they are very informative for someone who is not an economist, even if I don’t fully agree on the content. Firstly, I must say that, I’ve always been quite enthusiastic about the EU and its great potential, Europe being a chance for a knowledge-based society, cultural exchange, mobility, peace and other great ideals….However, the current economic crisis and everything that followed the “coming out” of the situation in Greece got me really worried concerning the future of the “common EU undertaking”. It all started with the Greeks being the “cheaters”, now we have Germany “destroying the European Union”. I’ve read a lot in the past few days about Germany’s export surplus being the deficit of ClubMed, and how Germany should be “forced” to recycle the surplus for the common sake of the EMU. Also Greece “threatening” with the IMF. Then pressure was set on Germany for bailing out Greece. And finally Juncker mentioning a twin solution; IMF and the EU bailing out Greece under European conditions. Well, I must say, I know my way around statistics and figures, but when it comes down to concrete economic instruments for implementing “correction of imbalances” I fail to grasp it.
Having a monetary Union without having a fiscal one in the first place was already difficult. But how do we implement a fiscal Union in a “non-national” state? Yes, there are treaties, and yes, contribution to EU-Budget is mainly based on the gross national income, which was an attempt of keeping “balance”. Germany has an export surplus AND is the largest net contributor, but this doesn’t seem to be “balanced” enough. CEPS and other think tanks in Brussels plead for stronger mandates of the EU Institutions, enabling a stronger “surveillance” of the national economies. Which brings us back to why the Greeks cooked the books and nobody from the EU could do sth. about it? Do we need stronger EU-mandates? Yes (?), but in which form or sector? And who is ready/eager to accept them? Would the proposed EMF (by Germany) be a good beginning, or just a Bad Bank in disguise? Would the Institutions implement or impose (bringing us back to “forcing” Germany)? And the whole thing is coupled to the global economy. How do we “regulate” speculation? Should we? And so on, and so on…
#6 by connected on March 24, 2010 - 10:53 am
Having said all that, I just want to conclude: Greece cooked the books, this is a fact. The Greeks have bad politicians, but I want to believe that in a democracy we vote for the ones that we think are going to represent us best. Greece’s austerity measures were a one-way street, mainly in terms of giving the “right” political message to the markets, as quickly as possible, thank you very much…. If it will be good on the long run for the Greek economy, I doubt it. Somebody’s exports are by definition somebody’s imports. The greater the imbalance, the more troubles you have. And maintaining such a great trade surplus can’t go on forever. If I were a German taxpayer with an elementary knowledge of “economics mumbo-jumbo”, I would be just plain fed up of “having to pay for everybody and get bashed on top of that for having a stronger economy”. If I were Greek, I would feel “drawn in the corner” by my fellow Europeans, BUT I wouldn’t play the Nazi card on the Germans and I would try to get rid of the notion that everybody owes me just because I am Greek. Actually, I am both. Maybe the IMF and the EU should bail out Greece on European conditions. That would also release some of the pressure on Germany. In any case, what should follow would be trying to figure out which way the EU wants to go and how. Sometimes lack of a common European identity is underestimated, being too “theoretical”,in contrast to money matters being the “real” problem. I think they are just the two sides of the same problem. People still carry notions or stereotypes with them, and politicians have to make decisions on economies. And certain decisions won’t be taken (even if a horde of economic advisors would suggest it), because this would be their political death. Not getting voted by a voting body still carrying a lot of stereotypes. Quo vadis, Europe, that’s what the Greek crisis revealed and I am still trying to answer that….
#7 by Chase on June 7, 2011 - 6:29 pm
These are hard to follow. Is there any other information on it??
Thanks..
Chase.
#8 by Stephen Nutt on June 10, 2011 - 1:20 pm
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I should agree with you. What is needed is a rebalancing of trade. But I think it’s quiet critical.
#9 by Tony Atwell on June 11, 2011 - 4:09 am
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I just want to emphasis this The latter should not be about enforcing ‘more fiscal discipline’ on the periphery at the cost of peripheral wages, but rather about giving the ECB a broader remit (growth and employment rather than inflation targeting) and establishing a Federal Budget large enough to redistribute surpluses—just as happens in the United States…
#10 by George Irvin on June 12, 2011 - 4:11 pm
@Tony: your comment is relevant, but the ‘inflatables Nashville’ URL points to an advert. Such messages are considered spam I’m afraid, and any message like this is future will be deleted automatically.
#11 by Tom on October 27, 2011 - 11:58 pm
As long as a few politicians and their backers have the power to decide eurozone policy and spend other peoples money, while enriching themselves and special interests with billions and billions that are going to (whom??) then the system can never work. Take Greece, now who exactly gets enriched by the bailouts – how much money do certain politicians and special interests end up with in their pockets? Lifetime retirements, bonuses, etc. This all makes the mafia look like kindergarden criminals.
#12 by Jacob on February 15, 2012 - 12:01 am
When euro was introduced USD was 0.8 … in 2008 it was 1.6 . Clearly the periphery had the wrong exchange rate and the wrong interest rates which fueled a consumption/construction boom. Clearly without a US-style fiscal union, the one size-fits-all euro is doomed to fail.
It is a make or break moment, or if we insist on keeping the eurozone as is it will end up in tears for everybody