A war of words has broken out between the US and the EU. Meanwhile, the White House seems to be busy accusing half the world of manipulating their currency to get an unfair advantage. There is a solution, but it needs leaders with imagination for it to be adopted.Germany has done very well, thank you, from the euro. But then again, the policy was hardly deliberate. Following the unification of Germany, the country went through a painful period of contraction in wages, and rapidly rising productivity. It came through the other end, a paragon of exporting success. It is proud of what it achieved.
The euro was not Germany’s idea, rather it was initially seen as a French idea. Germany wanted reunification between east and west, which was once see as controversial. France wanted the euro. So, we got both.
But there is no doubt that if the euro had not been formed, and Germany still used the Deutschmark, its currency would have seen a much stronger performance in recent years.
For the rest of the euro area – or most of it – this is a problem. But then the euro is a problem, it makes life difficult for country’s such as Spain that need to export more to Germany, but which, unlike the UK, do not have the luxury of a falling currency relative to Germany’s currency, giving them a terms of trade advantage.
And while it is true to say that the euro gives German exporters to the US an advantage, for much of the euro area it is a disadvantage. If Spain still had the peseta, it would surely have fallen much faster than the euro, post 2008.
And then there is QE. Don’t forget, under pressure from German hawks, the European Central Bank increased rates in the aftermath of the 2008 crash. And it was late, very late to the QE party, and when it did finally kick off QE, Germany was ultra-critical, with one top German central banker once likening QE to a Faustian pact with the devil.
The new US National Trade Council Director, Peter Navarro said that Germany “continues to exploit other countries in the EU as well as the US with an implicit Deutschmark that is grossly undervalued.”
Coming from the US, that adopted QE so enthusiastically and earlier this decade was accused of conducting currency wars by Brazil, that’s a bit rich.
But back in 1944, at Bretton Woods, John Maynard Keynes put forward a proposal, that, had it been accepted, would have solved today’s problems. Maybe it is not too late to re-consider it.
You need to bear in mind that Keynes was a very clever man. Bertrand Russel once said of him that when he argued with Keynes “I took my life in my hands, and I seldom emerged without feeling something of a fool.”
The point is that the greatest intellectuals of that age were afraid of Keynes’ intellect, afraid of being tied up in knots.
And that in part is why his idea was rejected. The American delegation at Bretton Woods just didn’t trust him. The result of that conference was a compromise, we got a system of exchange that lasted until the 1970s, The World Bank, and the IMF instead.
But Keynes wanted to see a system in which all international trade was conducted by a form of international currency, which he called the bancor. The bancor’s value was to be tied to a basket of currencies.
But Keynes proposed a system for penalising countries with large trade surpluses. The US, which today has the world’s largest trade deficit, but at that time had the biggest surplus, hated the idea, distrusted Keynes.
It was rejected.
Keynes, exhausted by the talks – or so they say – died soon after.
But that idea is more apt today than ever before.
We live in an age when experts are not in favour. We really could do with an expert of Keynes’ ability to re-advance such an idea, it may stop populism in its tracks.