Tag: Angela Merkel

6 February 20196 February 2019

A vision of global governance

Late January sees the annual global World Economic Forum meeting of politicians, businesspeople and the great and the good at Davos in Switzerland. Global economic, political, social and environmental issues are discussed and, sometimes, agreements are reached between world leaders. The 2019 meeting was somewhat subdued as worries persist about a global slowdown, Brexit and the trade war between the USA and China. Donald Trump, Xi Jinping, Vladimir Putin and Theresa May were all absent, each having more pressing issues to attend to at home.

There was, however, a feeling that the world economic order is changing, with the rise in populism and with less certainty about the continuance of the model of freer trade and a model of capitalism modified by market intervention. There was also concern about the roles of the three major international institutions set up at the end of World War II: the IMF, the World Bank and the WTO (formerly the GATT). In a key speech, Angela Merkel urged countries not to abandon the world economic order that such institutions help to maintain. The world can only resolve disputes and promote development, she argued, by co-operating and respecting the role of such institutions.

But the role of these institutions has been a topic of controversy for many years and their role has changed somewhat. Originally, the IMF’s role was to support an adjustable peg exchange rate system (the ‘Bretton Woods‘ system) with the US dollar as the international reserve currency. It would lend to countries in balance of payments deficit to allow them to maintain their rate pegged to the dollar unless it was perceived to be a fundamental deficit, in which case they were expected to devalue their currency. The system collapsed in 1971, but the IMF continued to provide short-term, and sometimes longer-term, finance to countries in balance of payments difficulties.

The World Bank was primarily set up to provide development finance to poorer countries. The General Agreement on Tariffs and Trade (GATT) and then the WTO were set up to encourage freer trade and to resolve trade disputes.

However, the institutions were perceived with suspicion by many developing countries and by more left-leaning developed countries, who saw them as part of the ‘Washington consensus’. Loans from the IMF and World Bank were normally contingent on countries pursuing policies of market liberalisation, financial deregulation and privatisation.

Although there has been some movement, especially by the IMF, towards acknowledging market failures and supporting a more broadly-based development, there are still many economists and commentators calling for more radical reform of these institutions. They advocate that the World Bank and IMF should directly support investment – public as well as private – and support the Green New Deal.

Articles

Merkel calls for global cooperation to reach ‘win-win outcomes’

Reuters, Paul Carrel (23/1/19)

Merkel makes a last-ditch plea to restore the international order led by the West

Quartz, Eshe Nelson (23/1/19)

World Bank President Jim Yong Kim bows out as the development lender looks for relevance

Deutsche Welle, Uwe Hessler (31/1/19)

Merkel defends global order with veiled swipe at Trump

Financial Times, Chris Giles (23/1/19)

The World Bank and IMF are in crisis. It’s time to push a radical new vision

The Guardian, David Adler and Yanis Varoufakis (31/1/19)

Address

Special Address by Angela Merkel, Federal Chancellor of Germany

World Economic Forum, Angela Merkel (23/1/19)

Questions

What was the Bretton Woods system that was adopted at the end of World War II?
What did Keynes propose as an alternative to the system that was actually adopted?
Explain the roles of (a) the IMF, (b) the World Bank, (c) the WTO (formerly the GATT).
What is meant by an adjustable exchange rate system?
Why did the Bretton Woods system collapse in 1971?
How have the roles of the IMF, World Bank and WTO/GATT evolved since they were founded?
What reforms would you suggest to each of the three institutions and why?
What threats are there currently to the international economic order?
Summarise the arguments about the world economic order made by Angela Merkel in her address to the World Economic Forum.

22 May 201723 May 2017

Trump and the German balance of payments

One of President Trump’s main policy slogans has been ‘America first’. As Trump sees it, a manifestation of a country’s economic strength is its current account balance. He would love the USA to have a current account surplus. As it is, it has the largest current account deficit in the world (in absolute terms) of $481 billion in 2016 or 2.6% of GDP. This compares with the UK’s $115bn or 4.4% of GDP. Germany, by contrast, had a surplus in 2016 of $294bn or 8.5% of GDP.

However, he looks at other countries’ current account surpluses suspiciously – they may be a sign, he suspects, of ‘unfair play’. Germany’s surplus of over $50bn with the USA is particularly in his sights. Back in January, as President-elect, he threatened to put a 35% tariff on imports of German cars.

In practice, Germany is governed by eurozone rules, which prevent it from subsidising exports. And it does not have its own currency to manipulate. What is more, it is relatively open to imports from the USA. The EU imposes an average tariff of just 3% on US imports and importers also have to add VAT (19% in the case of Germany) to make them comparably priced with goods produced within the EU.

So why does Germany have such a large current account surplus? The article below explores the question and dismisses the claim that it’s the result of currency manipulation or discrimination against imports. The article states that the reason for the German surplus is that:

… it saves more than it invests. The correspondence of savings minus investment with exports minus imports is not an economic theory; it’s an accounting identity. Germans collectively spend less than they produce, and the difference necessarily shows up as net exports.

But why do the Germans save so much? The answer given is that, with an aging population, Germans are sensibly saving now to support themselves in old age. If Germany were to reduce its current account surplus, this would entail either the government reducing its budget surplus, or people reducing the amount they save, or some combination of the two. This is because a current account surplus, which consists of exports and other incomes from abroad (X) minus imports and any other income flowing abroad (M), must equal the surplus of saving (S) plus taxation (T) over investment (I) plus government expenditure (G). In terms of withdrawals and injections, given that:

I + G + X = S + T + M

then, rearranging the terms,

X – M = (S + T) – (I + G).

If German people are reluctant to reduce the amount they save, then an alternative is for the German government to reduce taxation or increase government expenditure. In the run-up to the forthcoming election on 24 September, Chancellor Merkel’s centre-right CDU party advocates cutting taxes, while the main opposition party, the SPD, advocates increasing government expenditure, especially on infrastructure. The article considers the arguments for these two approaches.

Article

The German economy is unbalanced – but Trump has the wrong answer The Guardian, Barry Eichengreen (12/5/17)

Data

German economic data (in English) Statistisches Bundesamt (Federal Statistical Office)
World Economic Outlook Databases IMF

Questions

Why does Germany have such a large current account surplus?
What are the costs and benefits to Germany of having a large current account surplus?
What is meant by ‘mercantilism’? Why is its justification fallacious?
If Germany had its own currency, would it be a good idea for it to let that currency appreciate?
What are meant by ‘resource crowding out’ and ‘financial crowding out’? Why might the policies of tax cuts advocated by the CDU result in crowding out? What form would it take and why?
Compare the relative benefits of the policies advocated by the CDU and SPD to reduce Germany’s budget surplus.
Would other countries, such as the USA, benefit from a reduction in Germany’s current account surplus?
Is what ways would the USA gain and lose from restricting imports from Germany? Would it be a net gain or loss? Explain.