The agreement to coordinate global economic strategies was one of the most impressive achievements by the G-20 in Pittsburgh and at the IMF meeting in Istanbul. But without credible agreements on currency policies, that project could turn out to be very vulnerable, or even a Trojan horse allowing politically stronger countries (China and the United States) to transfer the costs of their disequilibria onto countries with weaker political influence. The first victims could be the euro area countries lacking a common political representation for their currency policy.
Giving free rein to a slight hypochondria, one could suspect that the eurozone exporting countries—primarily Germany and Italy—are going to pay the full bill of the global imbalances caused by the US trade deficit and the Chinese trade surplus with years of recession and unemployment. It would be more reasonable to consider a strategy of combining more economic stimulus in Europe with a bigger role for a European single political voice.
Persistent global imbalances and overly accommodating monetary policies are seen as the two main culprits of the global crisis on the macroeconomic side. Neither of these can be imputed to the eurozone. Monetary policy has been consistently stricter in the eurozone than it has in the United States, while the area’s trade current account position was broadly balanced.
But the symmetrical disequilibria of China and the United States, which have external positions that are severely unbalanced, could turn out to be factors of political strength in the global negotiations. China and the United States need to agree on the exit strategy from their trade disequilibria. If economic diplomacy were a matter of justice, China would stimulate its internal demand and the United States would accept a long slide into a correction of its consuming habits. China would substantially increase domestic consumption to absorb the whole decrease in the US trade deficit. Structural policies aimed at boosting domestic Chinese demand would probably need to be accompanied by an appreciation of the renminbi that would change the relative prices between tradable and nontradable goods, favoring the consumption of imported goods. World output would remain at its potential since there would be no world excess supply. This would allow the United States to ease the pain of adjusting its consumers’ attitudes.
But both China and the United States have a better alternative. China could resist an increasing absorption of American imports and decline the idea of relinquishing the peg to the dollar. Preserving the trade surplus is still seen in China as a matter of political strength and even of safety, especially from the perspective of an aging population. In such a case, US producers would be forced to lower prices and promote a round of competitive devaluation that would hit only the euro. Even if Beijing accepts a revaluation of the renminbi, it is not certain that China can absorb the equivalent of the US trade deficit. If one compares the dimension of the two economic areas, it is doubtful that Chinese families would step up their consumption habits by one-third, merely to absorb a 3-percent US trade deficit. This time it would not be the American exporters attacking the eurozone, but the Chinese.
In both cases euro area consumers would substitute domestic goods for foreign-produced tradable goods. And euro area companies would respond by reducing the production of tradable goods and reallocating investments from the tradable to the nontradable sectors—the foreseeable costs in terms of unemployment and loss of potential output. In other words, the euro area would accomplish the painful adjustment that the Chinese would not like to undergo in order to make it possible for Americans not to pay the price of past profligacy that they do not want to pay. And who exactly would pay among the Europeans? Well, obviously those countries whose growth depends heavily on export, Germany and Italy. This may sound unjust, but both countries have significant responsibilities in keeping domestic demand subdued and compressed by corporate interests.
Germany and Italy should liberalize the internal sectors of their economy or they will be tempted to undertake protectionism in the face of the China-US competitive pressure—what an analogy with the autarky of the post–Great Depression era, which brought tragic political consequences on those countries! But obviously, Pittsburgh is not Versailles. Germany and Italy will have to make their contribution to global growth while building up the political influence of the euro. Only in this way can they credibly ask for real global coordination.