Rising Powers and Economic Crisis in the Euro Area

Ferdi De Ville, Mattias Vermeiren, Mattias Vermeiren, Ferdi De Ville

• Publisher: Palgrave Pivot
• Year: 2016
• ISBN:
  9781137514400
• Topic: Politik & Internationale Beziehungen
• Subtopic: Handel & Tarife

In this book, Ferdi De Ville and Mattias Vermeiren examine the linkages between the economic crisis in the euro area and the rise of Brazil, India and China (BICs) in the global monetary and trading system. Drawing on the insights of the comparative capitalism literature, the authors show that the latter development has been a key source of the escalation of trade imbalances in the euro area, which are widely seen as an important cause of the financial and economic crisis in the region. By pointing to the external source of these imbalances and the divergent institutional capacity of the euro area countries to deal with the intensified competition associated with the rise of the BICs, De Ville and Vermeiren go beyond the focus on the divergence in unit labor costs as the driving force of these imbalances. As such, this book provides a comprehensive policy critique of the EU's export-led growth strategy based on declining unit labor costs.

© The Editor(s) (if applicable) and The Author(s) 2016

Ferdi De Ville and Mattias VermeirenRising Powers and Economic Crisis in the Euro AreaGlobal Reordering10.1057/978-1-137-51440-0_1

Begin Abstract

1. Introduction

Ferdi De Ville¹ and Mattias Vermeiren¹

(1)

Department of Political Science, Ghent University, Gent, Oost-Vlaanderen, Belgium

Abstract

In response to the euro crisis, the euro area has adopted an export-led recovery and growth strategy. With Germany as the example to be emulated, and its labor market reforms of the past decade in particular, especially the crisis-ridden member states in the south are instructed to improve their cost competitiveness in order to accumulate export surpluses with which to repay their debt. Emerging economies as the global growth engines of the coming decades are identified as the markets that should absorb these trade surpluses. How realistic are these objectives and the instruments that are identified to attain them? Are the right lessons drawn from the German example? This introduction lays out this problématique and introduces the main arguments, theoretical framework and research design of the book.

End Abstract

When the doomsayers say that Europe will struggle to compete in a globalised economy, I point to Germany .... Based on competitiveness, innovation and knowledge, German companies show how we can continue to succeed in a globalised economy.

Karel De Gucht (2010)

A part of the growth that Europe needs to generate over the next decade will need to come from the emerging economies as their middle classes develop and import goods and services in which the European Union has a comparative advantage.

European Commission (2010: 22)

The quote above from Karel De Gucht, former European Commissioner for Trade, has been one of the reasons why we have started thinking about the subject of this book. Similar to many statements by political actors in Europe in the past years, De Gucht argues here that the way out of the crisis and onto a future growth path for Europe is by going German; that is, accumulating trade surpluses and pursuing an export-led growth strategy. It is a post-crisis strategy that is being pursued in the euro area (EA) today and most radically for Southern Europe, where austerity and structural (mainly labor market) reforms are applied with the aim of making those countries more competitive by lowering their labor costs so that they are able to run trade and budget surpluses with which to repay their debts and restore their general economic health.

But how feasible is it for EA economies, especially in the crisis-hit countries in the south (Greece, Italy, Portugal and Spain ¹ ), to become as competitive in the globalized economy as Germany by following this route? What is their past record? How have the crisis-ridden countries, or alternatively called the ‘periphery’ of the EA, performed in international trade before the crisis? Can, perhaps, their current account and competitiveness problems that became so apparent with the outbreak of the global crisis partly be ascribed to extra-EA trade deficits? And if so, which role did competition from emerging markets play? Should their problems be understood primarily as related to price competitiveness and labor costs? Or do they rather not produce the right goods of high quality that are in dynamic demand by the developing industries and middle classes of emerging economies, singled out in official rhetoric as the future growth driver in the quotes at the beginning of this chapter? To what extent are these considerations taken into account in today’s crisis response policies in different areas such as trade, monetary and industrial policies? Are, in other words, the right lessons drawn from the German success?

We were puzzled by the relative academic silence on these issues. These questions have hardly been dealt with in our disciplines, International Political Economy (IPE) and Comparative Political Economy (CPE) and European Studies. Analyses of the euro crisis from such perspectives have tended to focus on internal, endogenous explanations. Asymmetrical dynamics after the introduction of the single currency within the EA are seen as the main causes of the crisis. One strand (the ‘fiscal camp’ that sees the crisis mainly as a budgetary phenomenon; Johnston et al. 2014: 3–4) focuses on the endogenous dynamics that led the Economic and Monetary Union (EMU) periphery’s governments to borrow too much after the introduction of the euro and the convergence of interest rates. Others (the ‘competitiveness camp’ that sees the EA crisis as primarily a competitiveness problem) focus on internal trade and capital account imbalances, whereby deficits of the south are merely seen as the reverse side of the surpluses of the north, induced by divergent unit labor cost trends, as the main sources of the EA crisis. As we explain in detail in Chap. 2, these imbalances are further explained as consequences of the EA’s macroeconomic policies, and the European Central Bank’s (ECB) one-size-fits-none monetary policies in particular. Scholars of CPE have drawn attention to the interaction of the ECB’s monetary policy with different national wage-setting mechanisms in the member states, which resulted in losses in price competitiveness for the south.

We will go beyond these traditional explanations in a twofold way. First, we overcome the narrow focus on intra-regional imbalances by showing that the north and south of the EA have also recorded very different trade balances outside of the region. Second, we argue that these different internal and external trade performances cannot be explained by an exclusive focus on structural (macroeconomic) dynamics of the EMU and/or wage dynamics in the member states. We hold that dynamics of non-price competitiveness—the quality differentiation of production and global demand and competition for products in which the different member states are specialized—have played a key role in these trade imbalances. In turn, we contend that the divergence of non-price competitiveness between the northern and southern Eurozone countries have been shaped by the divergence in skill regimes and production structures. Our analysis will reveal the contradictions in the current explanations of the euro crisis and prescriptions for recovery, which consider emerging economies to be part of the solution rather than scrutinizing their potential role in the challenges faced by the southern countries. Not only in the literature on EMU and the euro crisis these questions have been largely overlooked. Also in the literature on EU external trade policy, the EU is uncritically treated as one single, well-performing ‘bloc’, without profound interrogation of possible differences in trade performance between member states. This book aims to fill at once these hiatuses in both the political economy of the euro crisis literature and the IPE and European Studies literature on EU trade policy. It builds on an article published by Comparative European Politics (De Ville and Vermeiren 2014), which was, to our knowledge, the first attempt to apply (and go beyond) the insights of the varieties of capitalism (VoC) literature to EU trade politics.

We were evenly surprised that the potential significant role of extra-EA imbalances in destabilizing the EA (and the world economy) receives so little attention among policymakers in the region. European politicians and officials seem unperturbed not only by the (scant) academic but also by official international criticism of the EA’s export-led, mercantilist growth strategy after the crisis. During the past couple of years, the US government has frequently complained about Germany’s weak domestic demand growth and dependence on exports for having instilled a deflationary bias both for the EA and the world economy, urging EA countries with large and persistent surpluses to reflate their economies in order to ease the adjustment pressures. This and similar criticism by, among others, the International Monetary Fund (IMF) seems to fall on deaf ears in Germany. The Annual Economic Report 2014–2015 by the German Council of Economic Experts (2015: 1) reflects the persistent consensus in Germany: ‘The criticism of Germany expressed by countries outside the euro area is not convincing.’ Nevertheless, in consecutive in-depth reviews as part of the Macroeconomic Imbalances Procedure (MIP) of the European Semester, even the European Commission (EC) (e.g., 2014a) concluded that Germany’s persistently high current account surplus risks constraining trade rebalancing by the deficit countries. Still, the solutions proposed by the Commission have focused on demand-side policies (boosting investment and domestic consumption) and supply-side reforms (further liberalization of the services sector) in surplus countries; rather than proposing reforms and real financial support to enhance the productivity, quality and structure of the southern EA economies, its proposals for the latter countries do not go beyond the prescriptions incorporated in the Adjustment Programs and remain overly focused on fiscal austerity and labor market flexibilization.

It is even more puzzling that the euro crisis has hardly been linked to changing trade trends in the rest of the world and the rise of emerging powers in particular. Indeed, one of the most significant changes in the global monetary system—the introduction of the euro—coincided with one of the most significant structural transformations in the global economy—the rise of the emerging economies. At the same time as the first euro’s were being coined in 2001, Jim O’Neill from Goldman Sachs coined the term ‘BRICs’ to refer to the structural shift associated with the rise of Brazil, Russia, India and China. In the meantime, Russia has lost much of its once perceived economic glory so that more and more observers leave out the ‘R’ from the acronym and talk about the BICs as the main emerging economies. Between 1999 and 2013 (the period analyzed in this book), average annual growth in exports was 13.3% for Brazil, 19.8% for China and 18.6% for India, with average yearly growths in imports showing a very similar trend. ² We will analyze in this book how this enormous transformation of the global economy has interacted with the biggest monetary overhaul in history, the introduction of the euro. Our conclusion will be that the first significantly aggravated the imbalances set in motion by the second, and that this has confronted the periphery with both exogenous and endogenous economic problems that can be called (with a cliché, we must admit) a ‘perfect storm’. Our analysis shows that the current crisis response in the euro area is insufficient in the short term and unsustainable in the longer term. A more effective and equitable response would imply a balanced adjustment between the north (through reflation) and the south (through more moderate deflation) as well as, crucially, a public investment program for the south that would allow the peripheral member states to escape their stuck-in-the-middle positions and become economies of higher value added that are better positioned to thrive in the globalized economy.

Indeed, the rise of the BICs naturally represents both threats and opportunities for other countries in the world. As highlighted in the quote from Europe 2020 at the beginning of this introduction, their emerging middle classes’ appetite for fancy ‘western’ consumer goods and their industries’ need of high-quality capital goods mean export opportunities for industrialized economies’ firms involved in production of these. Moreover, their cheap exports increase the purchasing power of European consumers and represent low-cost input factors for European producers. On the contrary, their specialization in cheap consumer goods, and their rapid ascent up the value chain, represents potential competition for other sectors of developed economies. This is one of the main issues we delve into in the next chapters.

A Note on Data, Methods and Design Choices

This book relies on a combination of synthesis of secondary literature, analysis of primary data and expert interviews. The objective of this book is essentially modest. We do not claim to offer the explanation for the euro crisis that has been overlooked by each and every expert so far. Instead, we argue that, especially within our academic disciplines, but importantly also to a large extent in policy circles, too little attention has been given to the role of extra-regional imbalances in the run-up to the crisis and their origins in different skill regimes and path-dependent economic structures in the member states. Partly as a consequence of this neglect, there has also been insufficient critical reflection on the feasibility of the EA’s post-crisis growth strategy, which is largely based on imposing an ‘internal devaluation’ of labor costs on the southern countries in order to shift their trade balance from a deficit to a surplus. We critically describe, analyze and explain pre-crisis and post-crisis dynamics in extra-regional trade imbalances by bringing together different literatures in an, we believe, innovative and interdisciplinary way: insights from economics, political economy, international relations and European Studies on, inter alia, the euro crisis, monetary relations, trade politics, varieties of capitalism and the rise of the BICs are integrated.

We provide and analyze primary data on trade balances and structures of the EA member states and the BIC countries. These data and the patterns we discern in them are presented as stylized facts and should be interpreted with the necessary caution. We will try to clearly spell out what the data we have used and generated can and cannot tell us, and will compare our findings with other literature that sometimes uses other data sources and/or methods of analysis. Finally, we have done 30 expert interviews for this book. These interviews serve multiple purposes: we have applied them as an instrument for triangulating our findings and interpretations; we have used them as a source of information on national positions and policies vis-à-vis the issue of our study; and, finally, we have drawn on those interviews to get a better insight into how experts and policymakers in the EA (from within administrations and central banks at the national and supranational level as well as representatives of social partners) perceive our problématique.

There are a couple of choices we have made while developing this study that merit explanation. First, in order to assess how euro membership affected the competitiveness of the EA countries and mediated the effects of the rise of the BICs, we focus in this book on countries that were member states of the EA in 2001—the year the euro was physically introduced. As such, we have left out the central and eastern European countries, which only later adopted the euro. We also decided to leave Ireland and Lux...