Monday DeLong Smackdown Watch: How Important Is the Euro’s Effect on Exchange Rates on the German Economy, Anyway?
: What Would the German Export Sector Look Like?: “DeLong: ‘Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.’
I’ve considered it, and I think the answer is actually ‘more or less the same’. Looking at the actual current account of Switzerland suggests that a Germany which had fixed to CHF wouldn’t have necessarily done any worse…. And the story of the 00s in German exporting (the 90s, of course, were when Germany ran quite sizeable deficits) is one of the bilateral trade between Germany and China. German industry makes ‘the thing that makes the thing that makes the thing’, notoriously, which makes its exports very price-insensitive to a country like China, which has a huge export market for things, which ensures a massive domestic market for thing-making things, and a consequent import demand for thing-making-thing-making things.
The view of Ordoliberalism as being based on US demand as an importer of last resort isn’t by any means wrong, but if the Euro was structurally undervalued because of Greece (and Spain, presumably, a country of 11 million people and €240bn GDP can’t really be moving the value of such a large currency on its own), then why didn’t France benefit? Or Italy until about a year ago?
Everyone wants to find a version of history under which all the problems of the Eurozone are Germany’s fault, because everyone knows that all the solutions involve Germany paying. But it’s not really true; Germany spent the early years of ERM/EMU paying far more than anyone else was prepared to in order to smooth the adjustment path for the former Communist states.
And after fifty years of structuring everything in Europe to prevent German hegemony, is it really a big surprise that Germany isn’t well set up to act as a hegemon? Imagine if the USA had lost the war in the Pacific and was today being blamed for its failure to ensure the economic development of the Phillippines.
: Daniel Davies and Brad DeLong Debate Deutschland: “As usual, the posts to which I link are more interesting than this post…
…Brad DeLong discusses German economics and totally fairly uses Kevin Baker’s excellent explanation of the origins and nature of Ordoliberalism (please click the link to Baker’s post). Davies discusses one vigorous striking sentence in Brad’s post: “Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.”
Davies writes: “I’ve considered it, and I think the answer is actually ‘more or less the same’…. The story of the 00s in German exporting (the 90s, of course, were when Germany ran quite sizeable deficits) is one of the bilateral trade between Germany and China. German industry makes ‘the thing that makes the thing that makes the thing’, notoriously, which makes its exports very price-insensitive to a country like China, which has a huge export market for things, which ensures a massive domestic market for thing-making things, and a consequent import demand for thing-making-thing-making things.”
The ‘any’ in ‘wouldn’t have necessarily done any worse worse’ is clearly rhetorical hyperbole. Davies convinces me that Brad’s focus on the export sector was unfortunate. I would ask what the state of Germany’s current account would be. Even if German exports were totally price insensitive, Germany can import more. If Germans had spent the money they get from China on Mediterranean goods and services rather than lending it to Mediterraneans, things would be different.
Germany was very good at making things which make things which make things back in the 90s when they had a current account deficit…. Germany’s strength in this sector doesn’t make total German exports insensitive to real exchange rates and has no effect on imports–it is a statement about the level of exports, not the slope of net exports/GDP as a function of exchange rates….
The Eurozone has two huge problems. One is that Greece has debts it can’t and won’t repay. The other is that aggregate demand is too low. One perfectly fine solution to the aggregate demand problem would be for Germany taxpayers to grit their teeth and accept a tax cut…. If Germans were feeling incredibly generous, they might also consider accepting an increase in wages…. What we need is less German self sacrifice not more…. On Greek debt, Germany isn’t the only Euroblock country which won’t get its money back, and they won’t get their money back no matter what (even with flows discounted at an interest rate far below market rates). The debate on debt is over how long the Troika should extend and pretend and how much Greeks should be punished and humiliated.
Finally I think that, while the DeLong Davies debate is brilliant, it is tainted by mixing economics and moralism. German’s huge contributions to smooth the adjustment path for former Communist states were very admirable, but they are not affect the currently optimal German budget deficit.