Bill Mitchell — The German undervaluation obsession is resistant to ‘reform’

Martin Höpner, who works at the Max-Planck Institute for the Study of Societies in Cologne, recently sent me a copy of his latest paper – The German Undervaluation Regime under Bretton Woods: How Germany Became the Nightmare of the World Economy (published January 2019). He presented this research at a Makroskop workshop in Wurzburg on October 13, 2018 – I was on the same panel as him at that workshop and enjoyed some very productive conversation about these issues. It is a very interesting historical analysis of the way that the German elites (central bank, industry groups, banks, politicians, and trade unions) have collaborated since the 1950s to suppress domestic consumption and maintain the nation’s export competitiveness, even though this has undermined material prosperity for workers. The relevance of the analysis to current debates about the Eurozone and its capacity for reform are that the undervaluation regime is entrenched in Germany’s institutions, its history, its culture, and its power elites and have been that way for many decades. What the Europhile progressives, who still think reform is possible, have to show is that this entrenched position can somehow be abandoned. They have never provided any convincing argument to substantiate that hope/belief. That is why I continue to call them out as dreamers – good intentions but naive to history....

It is hugely to the advantage of the German elite to devalue the DM in effect by substituting the euro for it. This is the foundation of contemporary German mercantilism. It is a major reason the EZ cannot work. The advantage to Germany is too great under it, and the German elite is not willing to give it up.

Bill Mitchell – billy blog
The German undervaluation obsession is resistant to ‘reform’
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

The Euro is Not Without Alternative
Wolfgang Streeck

Peter Diamandis — China Is an Entrepreneurial Hotbed That Cannot Be Ignored

During dinner, Kai-Fu lamented that 10 years ago, it would be fair to call Chinese companies copycats of American companies. Five years ago, the claim would be controversial. Today, however, Kai-Fu is clear that claim is entirely false....

SingularityHub
China Is an Entrepreneurial Hotbed That Cannot Be Ignored

Peter Diamandis | Chairman and CEO of the X PRIZE Foundation

Dalia Marin — The China shock: Why Germany thrived while the US struggled

Previous research has shown that China's entry into the WTO in 2001 has had a profound impact on jobs and wages of low-skilled workers in the US in sectors exposed to Chinese imports. The same is not true for Germany. This column argues this is because the import-side trade adjustment to low-cost competition had already happened before the rise of China, because the rise of Eastern Europe offered new export opportunities for German firms, and because China’s love for product quality found a perfect match in German products.

Vox.eu
The China shock: Why Germany thrived while the US struggled

Dalia Marin | Chair in International Economics, University of Munich; CEPR Research Fellow

Bill Mitchell — IMF continues with its wage-cutting line

In November 2015, the IMF released an IMF Staff Discussion Note (SDN/15/22) – Wage Moderation in Crises: Policy Considerations and Applications to the Euro Area – which purports to measure “the short-run economic impact of wage moderation and the implications for policy in the context of the euro area crisis”. It juxtaposes the impacts of the so-called internal devaluation approach with the impacts of Eurozone monetary policy. It recognises that the euro zone countries cannot use exchange rate depreciation to boost domestic demand but argues that instead, “lower nominal wage growth … and lower inflation or higher productivity growth relative to trading partners is needed”. The paper presents the standard mainstream arguments that: 1) wage cuts improve employment through increased competitiveness; 2) interest rate cuts stimulate overall spending; 3) quantitative easing stimulates overall spending. There is very little empirical evidence to support any of these statements, especially when fiscal austerity is accompanying these policy measures. The discussion does acknowledge wage cuts may be deflationary and “work in the opposite direction of the competitiveness affect”, in other words, domestic demand and overall growth declines. The unstated message is that internal devaluation doesn’t really improve competitiveness when it is imposed across the currency bloc and undermines domestic spending, which further impedes any export growth (because domestic income drives import demand).

Continue bleeding the patient.

Bill Mitchell – billy blog
IMF continues with its wage-cutting line
Bill Mitchell | Professor in Economics and Director l Employment and Equof the Centre of Fulity (CofFEE), at University of Newcastle, NSW, Australia

Dani Rodrik — Back to Fundamentals in Emerging Markets

Useful post. I would take issue with the following assertion, however, which seems to be based more on ideology than fact.

China’s economic achievements are undeniable. But it remains an authoritarian country where the Communist Party retains its political monopoly. So the challenges of political and institutional transformation are immeasurably greater than in India. The uncertainty that confronts a long-term investor in China is correspondingly higher.

It's myopic. China has been so successful because of its centralized control and strategic planning. India remains mired in the past owing to the condition of its bureaucratic and dynastic political system, which, although democratic, is lumbering, cumbersome, and corrupt. China has a clear advantage here, and foreign investment in China shows that sophisticated investors realize it.

Project Syndicate
Back to Fundamentals in Emerging Markets

Dani Rodrik | Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government

David F. Ruccio — Only in America

This past Tuesday, officials of AM General celebrated the production of a Mercedes-Benz sport utility vehicle for export to China in a factory in Mishawaka, Indiana that once built Hummer S.U.V.s for General Motors.

Find the comparative advantage here.

But it is shades of things to come when the now developed world is making stuff chiefly for China and India and they other populous countries like Indonesia as globalization matures. That's where the volume is.

Occasional Links & Commentary
Only in America

David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

Ramanan — Economists Can Be So Wrong

Contra Krugman, whose specialization is trade. Wynne Godley quote as a bonus.

The Case For Concerted Action
Economists Can Be So Wrong
Ramanan

Marshall Auerback — The ECB Agrees With France: The Euro Is Too High

When neo-mercantilism is the model, then currency devaluation bestows competitive advantage in trade, and currency appreciation undercuts exports upsetting the business plan.

Focusing on the euro, ECB President Draghi pointed to large capital outflows out of Russia of about $160bn. Some of this may have gone into euro denominated investment, increasing unwanted upward pressure on the currency.

Macrobits by Marshall Auerback
The ECB Agrees With France: The Euro Is Too High
Marshall Auerback