Europe Will Lead Reform of Globalization

Over the past half century, globalization has developed around a peculiar economic structure. The United States has been the market and buyer of last resort in the global economy. It has pursued policies that stimulate domestic consumption to achieve growth while continually reducing its levels of national savings and sending its Treasury Secretaries forth to repeat endlessly that “a strong dollar is good for the U.S. economy.” Although it used various protectionist measures from time to time, the United States has largely kept its markets open to imports while calling on others to do the same. That its markets have been very open is attested by the fact of its immense $800 billion plus current account deficit.

In contrast, first Japan and then most of the rest of Asia has pursued neo-mercantilist policies based on an export led growth strategy. This approach has resulted in strong incentives for and the achievement of high domestic savings and investment rates along with a high degree of de facto protection of domestic markets. Accumulation of current account surpluses has been pursued as a matter of policy and such surpluses have been achieved.

The result has been a global economic structure characterized by large U.S. trade deficits and equally large Asian trade surpluses. As this structure has sometimes resulted in dislocation and adjustment costs in the United States, U.S. officials and legislators have often complained bitterly, accusing the Asians of being “unfair” and “predatory.” Heated debates and negotiations and even threats of retaliation have ensued and sometimes actually been implemented.

All the while the EU has largely stood to the side, warning of the “threat of rising U.S. protectionism” while congratulating itself on its comparatively balanced trade and relative success in Asian markets. There were a number of factors behind the EU’s apparently better performance. On the one hand, the euro began life by falling relative to the dollar, thereby reducing the dollar value of European exports. On the other hand, EU markets tended to have more invisible barriers and inhibitions to trade than the U.S. market. On top of that, EU savings and consumption and investment rates were much more balanced than those of the United States.

But that was then and this is now. Today, the EU current account deficit with Asia has come to far surpass that of the United States. The euro has risen 70 percent against the dollar in the past two years and the GDP of the EU has grown so that the EU has now surpassed the United States to become the world’s largest economy. Moreover, while the German section of the EU economy remains especially robust, other parts such as Spain, Italy, Ireland, and the UK are beginning to wilt. So the EU has replaced the United States as Asia’s buyer of last resort and is now beginning to feel the same kind of dislocation and costs of adjustment previously felt by the United States. Indeed, Europe feels this even more than the United States for two major reasons. One is that the EU economy is less integrated than that of the United States and the interest rate set by the European Central Bank (ECB) is thus less appropriate for some major parts of the EU than is the case for rates set by the U.S. Fed. Secondly, labor mobility and general economic flexibility are much lower in most of Europe than in the United States. Unemployed Italians are probably not going to move to Germany for new jobs while unemployed Americans in Michigan will move to other states whose economies are in better shape.

It is this shift in the position of Europe that has resulted in the sharpening of the tones of Commissioner Mandelson’s comments on Japan. For instance, Mandelson noted that “for every dollar Japan invested in the Netherlands and the UK, European companies were able to invest a net total of only three cents in Japan.” From the mouths of certain Americans in the past such comments might have been called “Japan bashing.”

Nevertheless, it is more likely that the EU will be able to effect a change in Asian economic strategies and the structure of globalization than the United States. For one thing, Asians have long defended themselves against U.S. charges of being unfair traders by pointing to the lack of complaint from Europe. Said the Asians, “the problem with you Americans is just that you don’t try hard like the Europeans.” So if the “hard trying” Europeans are also now complaining of unfairness, the charge may be harder to deny. At the same time, the dramatic increase in the value of the euro compared to little if any increase in the value of the Asian currencies over the past two years, highlights the fact that many of the Asian countries including OECD members Japan and Korea are continuing to manage their currencies to achieve export surpluses in the context of a world economy suffering from declining growth. Finally, the addition of European support to long standing complaints from the United States will obviously change the political balance in the councils of the world trading community.

In view of the fact that most economists view the present current account imbalances of the global economy as unsustainable, this may all turn out to be a rather good development.