Robert Wade, Guest Blogger
In all the debate about the future of the euro two big, obvious points are often overlooked. I was reminded of them reading Financial Times columnist John Plender, “Only the weakest will triumph in euro battle”, September 8th 2012. He said, rightly, “We forget the mutual nature of the creditor-debtor relationship at our peril.” But he went on to obscure this mutuality by focussing only on the transfers from Germany/North to southern Europe to keep the euro going.
The mutuality of the creditor-debtor relationship implies that the Eurozone must meet two conditions. First, it must create an arrangement which imposes disincentives to run continual surpluses as well as disincentives to run continual deficits. In the Bretton Woods negotiations Keynes emphasised this point, at the level of the world economy, but the Americans, then running big surpluses, would hear none of it.
Second, the Eurozone must account for not only the transfers from northern to southern Europe, but also the implicit transfers from South to North. The market value of the euro has been held down by the inclusion of less-competitive southern economies, to the substantial advantage of the North. Mr Plender’s statement that “under any scenario that involves keeping the euro intact Germans will see a large portion of their products and savings diverted from real German spending power to subsidies to the debtor countries” begs the question of how those German products and savings came into existence. Part of the answer is the lower-than-otherwise value of the euro and the higher-than-otherwise demand for German products in southern Europe financed by northern credits. Once northern politicians and economists account for the implicit transfers from south to north, the current anger-provoking image of “hard-working Germans bailing out feckless southerners” might begin to be softened.
Robert H. Wade is professor of political economy at the London School of Economics and the winner of the 2008 Leontief Prize for Advancing the Frontiers of Economic Thought.
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