Meanwhile in Europe…(20). Current accounts. French history repeats itself (in Germany).
from Merijn Knibbe
Some countries in the European Union have large and persistent current account deficits. According to Hans-Werner Sinn this situation is “a balance-of-payments crisis whose solution requires real adjustment of prices and wages in the periphery countries”. He means: internal deflation, engineered by mass unemployment. However, some other countries in the European Union have large and persistent current account surpluses (see the graph, click here for an enlarged graph).
Might it be possible that the surplus countries have to adjust too? History suggests they should. Around 1930, France wrecked the Gold Standard by hoarding gold. The frank was undervalued. French export industry thrived and the country had large and persistent surpluses on the current account. But the pound was overvalued and the UK had large and persistent deficits on the current account. The French government however did not want to revaluate and, in the end, did not even agree to lending gold to the UK anymore when the UK needed this gold to finance its large and persistent deficits. This is the flaw in the system which in 1931 led to the end of the gold standard: countries losing gold were required to carry out contractionary fiscal and monetary policies to restore balance of payments equilibrium, but countries accumulating gold did not come under equivalent pressure to impose expansionary policies. Sounds familiar. A real adjustment of prices and wages in ‘Greater Germany’ seems warranted.
Greater Greece: Bulgaria, Cyprus, Czech Republic, France, Greece, Hungary, Iceland, Estonia, Italy, Ireland, Latvia, Lithuania, Portugal, Poland, Romania, Spain, United Kingdom, Slovakia, Slovenia. Combined population about 360 million people.
Greater Germany: Austria, Belgium, Denmark, Germany, Luxembourg, the Netherlands, Sweden, Finland. Combined population about 140 million people.
Simple arithmetic shows that the deficit per head in ‘Greater Greece’ is quite a bit smaller than the ‘surplus per head’ in ‘Greater Germany.
All data: Eurostat