Huh, what’s this? My first english blog post. But a recent blog article by Paul Krugman just had to be replied to – well, probably in English.
Anyway, Mr Krugman talks in his article about the reasons for the european debt crisis and comes up with the old – but wrong – answer that it’s about the intra european imbalances that draws capital from the “south” to the “north”. Plainly, us evil Germans outproduce and outexport those poor southerners.
Obviously, Mr Krugman has a point in saying the north has current account surplusses and the south has current account deficits, which is indeed worrisome. But to me, current account balances are nothing more than numbers stating how things are. You cannot bring a country’s current account balance down (in absolute terms), by saying so or threatening with penalties. The current account mirrors the decisions of millions of people in a country, decisions that are rooted in their preferences. Germans don’t like to export everybody else to dust – we just like to produce good stuff and save a lot, because we’re an ageing society. It’s as simple as that. This is micro. This is deep within my people. Sorry for that, but there’s nothing I can (and will!) do about it. Our current account surplus just mirrors our preferences. And also our high net foreign position that is the basis for private pensions is at risk too, if the counterparty defaults. So when we talk about haircutting southern debt, we also talk about haircutting private pension yields. Not so easy an argument anymore, is it?
So, yes Mr Krugman is right in pointing out the dangers of current account imbalances, but this is not the cause of our fiasco.
As I argued here and again here (sorry, German only), its more about the south being hair-raisingly unproductive, especially compared to Germany’s famous Mittelstand. I’m not saying Germany is without fault – look at our services sector productivity and you’ll get the creeps. But the point I’d like to emphasise is, that its not the current account imbalances that caused the crisis, it is the unproductiveness of the south. Which can be partly explained by generous EU subsidies, entrenching unproductive industries and hindering innovation. Another part is about a decade of utterly cheap government refinancing by lowest bond yields creating all sorts of crowding-out and inflexible state businesses.
Getting the south back on track is probably harder and more expensive than transforming the former GDR from communist badlands to an integral and productive part of Germany. There is a proposal by the FTD (again sorry, German only), that I will endorse and comment on in a later article. True again, there must be growth in the south but in a way that promotes sustainable competitiveness. But any plan like this would require political effort and courage to implement business and growth friendly policies. The lack of these is Europe’s true problem.