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Tuesday, December 13, 2011

Stephen King on the EZ Shining (sorry, Failing... wrong Stephen King!)

Stephen King has an interesting piece on "Why the eurozone deal will fail" in today's Financial Times. This inspired me to write the following comment (and not only to drum up more readership for this blog through a back door - come on readers, start commenting and viral spreading!):

The Euro always was "newly-created pieces of paper uncannily similar to mortgage-backed securities" (see my blog http://silverberg-...-was-like-cdo.html). And that's why it is finally crashing down like a house of cards.

King is right that the only viable rebalancing would have been through higher German consumption (said that as long ago as Jan 18 - - sorry to trumpet my horn again). So why is Germany so adamantly refusing to go that route? Either unimaginable economic incompetence, dark designs on Europe a la Bernard Connolly or Tony Corn [nb Tim Crow in the original - sorry Tony, the heat's getting to me], or the expectations that low-wage deflation in the EZ periphery and full integration into Germany's supply chain [nb "change" in FT original] will eventually turn the EZ into an even more powerful export machine generating even greater export surpluses. The name of the game in the world economy now seems to be a race to the bottom of unit labour costs, not primarily through productivity growth but via old-fashioned exploitation of labour. A game Germany is evidently not willing to cede to "Marxist" China: who can exploit their migrant/EZ periphery workers better on a world scale.
 Since my last post two days ago on "Kowtowing to Berlin" I have been pondering whether there is a third alternative explaining German intransigence somewhere between simple economic pigheadedness and dark designs. This is the best I can come up with without violating the assumption that the German elites, whoever they may be, are guided by some remotely rational interpretation of their own self-interest. Of course, this may not be the first time that an elite's pursuit of its purported self-interest led to disaster (German history is not the only one replete with them - just think of the second Bush's Iraq war).

But this longer term "strategy," if such it may be, will not work if the EZ collapses this week because the "cavalry" of the ECB is not unleashed to rescue Italian and Spanish sovereign debt. Germany cannot have it both ways - the center of a web of low-cost labor feeding its potent industries while refusing to mutualize all the costs of a currency zone, including fiscal transfers and an effective central bank. Even highly corrupt and supposedly governance-incompetent countries like India and China, both vastly larger and more diverse than the EZ, have no trouble successfully managing their currency zones. They have larger regional disparities in productivity, infrastructure, governance, human capital, and language and yet no one fears a run on their sovereign debt or a currency breakup (not that they don't have myriad other problems). Thus one would expect of German leadership a higher level of competence and willingness to bear burdens. Small-mindedness of export surplus countries will be the undoing of the world economy. Either they have the vision to undertake Marshall Plan-like projects in their dependent periphery in their own self-interest (like the previously isolationist USA after WWII), or they have to accept raising their consumption levels. Stephen King is right that the laws of export arithmetic do not leave a third alternative. But the laws of political arithmetic still leave the field open for speculation on German motives, Machiavellian or otherwise.

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