September 1st, 2011
in Op Ed
by Guest Author Marshall Auerback, New Economic Perspectives Follow up:
Hans-Olaf Henkel's piece in today's Financial Times is making waves. Okay, Henkel is an odious man, but my view, which was once considered borderline crazy, is now getting more serious consideration. The Germans were willing to go into a currency union because by construction that agreement removed the weapon of exchange rate depreciation from its competitors. German real wage discipline, labor productivity gains, and engineering innovation could not be undercut at the stroke of a pen.
Germany #1 being the Bundesbank and "finanzkapital", which retains huge phobias about the recurrence of Weimar-style hyperinflation, and retains an almost theological belief in "sound money". It is the Germany of closet gold bugs and Austrian economists, who believe in hard money, "responsible" fiscal policy and the like, and who were basically always antithetical to the euro as a big and broad union. Then you had the "Europeanists" (Germany #2), led by Helmut Kohl, who essentially argued that you solve the "German problem" by binding Germany ever more fully into a pan-European framework, the currency union being a key part of that. The swing vote was Germany #3, Industrial Germany which bought into the idea of the currency union precisely because it locked Germany's industrial competitors at a fixed exchange and removed the expedient of devaluation.
It seems to me, however, that the swing vote is beginning to have 2nd thoughts, as they wrongly consider the "costs" to the country through these repeated bailouts. This concern seems to be overriding the obvious benefits of having "profligate" Mediterranean countries buying yet more German imports. It is striking to me that Henkel, a big player in the German industrial complex, is now leading the charge for withdrawal. It might suggest that an important political dynamic in Germany has shifted. German policy makers would have to conclude there is no plausible exchange rate for the Neuro and the Pseudo (or Soro?) that would cause a problem for their current account surplus and their export led growth strategy. Or they would have to conclude that is the "least worst" option given the political backlash of more subsidized loans to Greece, Portugal, etc.
The other point is this: Multinationals don’t care about where demand comes from as long as it is increasing somewhere and they are allowed to go after it. Labor arbitrage is the additional icing on the cake. So policies that build unsustainable imbalances between countries and have bad social outcomes are fine with them as long as they can roam the globe freely to take advantage of the demand wherever it pops up.
This probably remains true so long as the ultimate price of these polices don’t get shared with the multinational (in the form of taxation or additional regulation). So far the multinationals have it good in that costs are falling disproportionately on others. That could well change if there was a “solidarity” tax imposed on profits instead of the populace.
Follow up:Recall that there are basically 3 Germanys:
Prediction: Demand Will Rule the World by Michael Pettis