Archive for March 16th, 2010

Tuesday, March 16, 2010

No Growth at the Consumers’ Expense

Currency manipulation is many U.S. Congress members’ favorite term when explaining – and criticizing – China’s still huge trade surplus. In the long run, the U.S.-Chinese trade pattern isn’t sustainable. But an appreciation of the Yuan is no universal remedy. An undervalued currency is only one factor out of many in international trade.

France and Germany have the same currency. All the same, French finance minister Christine Lagarde urged Germany on Monday to boost domestic demand and said Germany’s large trade surplus was endangering the competitiveness of other euro zone economies. Germany’s reactions basically sound like an unofficial Chinese reply to American complaints: “Maybe you simply aren’t competitive?”

Günter Oettinger, until recently a regional prime minister in Germany and now the European Commission’s energy commissioner, doesn’t appear to have fully arrived in Brussels yet – mentally, that is. He still sounds like a German prime minister: Europe needed more reforms, of the kind Germany had implemented during the past decade or so, he is quoted as saying.

He certainly isn’t completely wrong. German companies don’t only compete with European companies, but with America and Japan, too, as Oettinger points out. So do other EU member states, and wage restraint can be one choice to become more competitive on global markets – for a while.

But then, wage restraint is also one of the tools which helped building both China’s and Germany’s trade surpluses. And by keeping wages low, you restrain consumption, too. Adjusting to a competitive environment by choking wages doesn’t solve the problem of lacking domestic demand. The race in terms of “who does best in squeezing the workforce” leads downwards, if everyone joins this kind of “competition”.

It might be time to remember that innovation, and the ways companies organize their production processes, are competitive tools, too.

Keeping wages down is a win-lose design at best. And in the long run, it’s lose-lose.

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