In the Financial Times of March 31st, Martin Wolf set down a straightforward criterion to evaluate the outcomes of the G20 meeting in London. Will they decide, he asked, to put forward a plan to shift world demand from the countries with a balance of payments deficit to those with a surplus? The underlying reasoning is just that of Keynes at Bretton Woods in 1943-44, for whom the surplus countries contributed to a dearth in demand. Hence they should be made to spend their savings (surpluses), thereby importing from the deficit areas. Wolf’s hunch was that they would not even attempt to approach the issue. His guess turned out to be correct. As noted by the New York Times, the G20 has agreed to endow the IMF with 1.1 trillion dollars in the event of developing countries falling into balance of payments crises and needing loans. Yet, the paper points out, the G20 has made no provision to stimulate world demand.
The 1.1 trillion dollars are funds made available to private banks by the public refunding of the IMF. Countries that cannot meet the payments to banks are to ask for a loan taken from those funds to pay them. In one stroke the G20 succeeded in revitalizing the role of the IMF as a creditor and future debt collector. The bad reputation of the IMF in the years of the Washington Consensus stemmed precisely from the fact that it acted as a banker and not as an agency enabling development. Contrary to official declarations about fighting the crisis, the crisis itself has become the midwife of the old IMF in new clothing. The IMF could have been given even 3 trillion dollars; a larger sum would have made no difference to the issue of fighting the collapse in world demand. Those 3 trillions would have still represented only endowments for lending to governments in crisis (i.e. unable to meet payments), not funds for financing the recovery of effective demand and of employment. In other words, the G20 didn’t even address, let alone untie, the knot highlighted by Martin Wolf in the Financial Times. To really untie the knot, however, it is absolutely necessary to put an end to wage deflation in the Eurozone and to radically reorient the productive structures of the Japanese and Chinese economies. That seems to escape the Financial Times‘ concern.
France and Germany do not even want to hear the term economic stimulus. Last October, Angela Merkel stated that she wouldn’t spend one euro for the rest of the Eurozone, as such a move would weaken Germany’s financial position. In the interview given to the Financial Times on the 27th of March, Merkel went further, stressing openly that Germany does not intend to change its reliance on (net) exports, that is, on persistent external surpluses. For the German government and corporations, their own domestic economy should not be “stimulated.” Their (wrong) rationale is that the size of the German economy will make a German stimulus bigger than that of the other Eurozone countries and that thus Germany will start taking in imports, jeopardizing its net external position. The same argument is made in a more devious way in France. If we reflate, says President Sarkozy, imports will gain most. Thus, argues the President of the French Republic, to come out of the crisis, people should work more and increase productivity. Clearly the objective is to export the ensuing surplus output since wages, under the wage deflation ruling in the Eurozone, will hardly rise on a par with productivity. This implies that domestic demand cannot possibly rise with the expansion of production. Hence Sarkozy’s words simply mean to work more in order to export more.
For both Germany and France, as much as for most of the European countries, to increase exports means mostly to expand them within Europe itself. This is what characterizes intra-European neomercantilism (except for the UK). It is a built-in feature since the years of the Common Market, but it became unavoidable with the unwillingness to move towards a Federal Europe and with the systemic trade deficits of Europe with China, Japan, and East Asia. Since the formation of the euro in 1999, competitive wage deflation is the pillar of intra-European neomercantilism. In the Eurozone, the race towards wage deflation has replaced the competitive exchange rate devaluations (or currency realignments, as they were called) occurring periodically in Europe since 1971, when the United States put an end to the Bretton Woods system of fixed parities. The guarantee of a persistent wage deflation throughout the Eurozone resides in an austere currency based on an equally persistent anti-inflationary stance by the Central Bank managing it, the ECB. This is an additional and important factor ruling out stimulus-oriented policies in Europe, and it is consistent with the neomercantilist direction of Germany, France, Italy, Benelux, Austria (Spain, Portugal, Greece, and Ireland have been running long-term large trade deficits). The austere currency is the euro, which has a remarkably close institutional resemblance to the infamous gold-based French Franc of the 1930s known as le Franc Poincaré.
In this austere gold standard-like framework, both Paris and Berlin are interested in bringing their banks into a protected monopolistic cocoon with guaranteed financial rents. The clearest example comes from France, where despite the losses on the stock exchanges and the crash of several hedge funds owned by the giant BNP-Pays Bas, banks, including the aforementioned one, still posted hefty profits as recently as February. On the German and the French side, the crisis is portrayed in a populist manner, as the product of the corrupt U.S. financial system which has exposed the innocent European banks to the contagion coming from the subprime market. This attitude, stemming as it does from the Poincaré 1930s nature of the euro-currency governing intra-European neomercantilist conflicts, goes a long way toward explaining why France and Germany are dead set against economic stimuli but strongly in favor of new financial regulations which would sharply curtail the more risk-prone lending posture of U.S. banks and financial institutions.
Meanwhile in Washington, the hope placed in reflating the mountain of toxic assets, thanks to the rigged auction plan devised by Geithner and Summers, proves that there are no serious intentions to reform the banking system. Hence, President Obama’s willingness to apply significant fiscal stimuli is being tied to the defense of the position of the megabanks and to the artificial revaluation of toxic assets. The United States no longer wishes, however, to act as the main world net importer because global imbalances are now acknowledged to augment volatility and financial instability. Whether or not it’s possible to achieve it, the U.S. objective cannot but worry the Eurozone and Japan. (China too is worried, but its case is more complex.) An eventual reduction of the role of the United States as the only large non-EU net importer of Eurozone products and as the crucial importer to close the effective demand loop for Asia would imply a strong devaluation of the U.S. dollar relatively to the euro and the yen. Given that neither Paris nor Berlin would allow spending on the EU economies, the European crisis is bound to worsen.
Like the U.S., Japan also plans to stimulate the economy. Yet past experience shows that it is very difficult for Japan to be Keynesian. The country is full of excess capacity far beyond what the domestic market could absorb. Its domestic industrial structures are developed in sync with the global oligopolistic role of its multinationals. The Japanese economy is therefore as structurally dependent upon world demand as are its multinational companies. In practice, this means that Japan’s stimulus must come from China and the United States, given that Europe has decided to freeze itself out in a latter-day euro-gold currency system.
China is experiencing the worst effects of the crisis. Millions have lost their jobs and several more millions will follow in their wake. In the exporting areas, whole industrial parks are being emptied. There are no substantial social safety nets, health care is expensive, and therefore it is extremely difficult to for a jobless worker to live in a city. Since a year ago, twenty million unemployed workers have returned to the much poorer countryside. Such “repatriations” are also encouraged by the government. China does intend to spend to mitigate the crisis. However, the measures undertaken so far favor the heavy industrial sectors, thereby increasing the gap between investment and consumption.
Nevertheless, the issue now is precisely how to expand the domestic consumption goods market so that the capacity in many exporting sectors can be reactivated. It is evident that China is seeking to recalibrate the export-led growth strategy rather than abandon it. Hence it is reluctant to operate a major shift towards domestic consumption. In this way, China exposes itself to the impact of any further devaluation of the U.S. dollar. While the gap in money wages between China and the United States will remain so large that, in the case of a strong U.S. recovery, China can expect its exports to pick up again even in the face of a devaluation of the U.S. dollar, the currency management implications will be, and already are, serious. China finds itself today in a situation where its dollar-denominated assets are not profitable because of the low interest rates in the United States and a depreciating dollar. Since China’s exports are not rising, indeed they are shrinking, the sacrifice of holding dollars is not offset by gains in external trade, especially with the United States. Beijing does not want to rock the boat, but it does aim at formulating a world policy for the governance of the dollar. China is using its current holding of U.S. debt as a lever to gain more weight within the IMF where its presence is still minimal. The United States will never agree to have its currency policy managed by other countries, however. Thus the question of U.S. dollar assets abroad is bound to boil over economically as well as politically.
Not one participant among the G20 has provided a compelling analysis of the crisis and a framework worth discussing. Likewise, no one among the so-called economists (of any persuasion) has a lucid vision of the future comparable to that of Keynes at Versailles in 1919, who foresaw the tragedy that was to devastate Europe.
Joseph Halevi teaches political economy at the University of Sydney. He is a member of the international editorial board of Economie Appliquée (Paris) and of the editorial board of Cahiers d’Economie Politique (Paris). He is also associated with France’s National Research Council’s Institut de Recherches Economiques sur la Production et le Développement at the University of Grenoble. Since 1990 he has been a regular contributor to Il Manifesto. This is an expanded version of “Il summit e i conflitti intercapitalistici” published by Il Manifesto on 4 April 2009.