Almog Adir and Simon Whitaker In the last few years there has been a small net overall flow of capital from advanced to emerging market economies (EMEs), in contrast to the ‘paradox’ prevailing for much of this century of capital flowing the ‘wrong’ way, uphill from poor to rich countries. In this post we show […]
Yanis Varoufakis is a self-styled ‘erratic Marxist’ and a former finance minister of Greece under the Syriza-led government. He penned his illuminating book The Global Minotaur (TGM) some years ago, in the aftermath of the evolving Global Financial Crisis.
He has become a prolific writer for the intelligent layman, and his website is well worth a look, particularly for those interested in progressive reform in the European Union and the Eurozone.
TGM is Varoufakis’ thesis on the roots of the crisis, which according to him lie back in the 1940s, towards the end of World War II. At that time, the US had emerged as the global capitalist hegemon, economically, politically and militarily.
The 1944 Bretton Woods Conference in New Hampshire was attended by such figures as the economist John Maynard Keynes, who led the British delegation, and Harry Dexter White, his US counterpart. The aim was to construct a post-war global economic and financial order which would avoid another Great Depression, as had occurred in the 1930s, and the achievement of peace and prosperity via international cooperation. Continue reading
The Economist magazine leads this week with an article on Germany’s large current account surplus and the problems it is causing the rest of the world.
This surplus, which means that Germany is lending its equivalent abroad, is equal to the excess of national saving over national investment.
It means that the rest of the world is running a current account deficit with Germany, since the sum of all the world’s current account surpluses and deficits is zero. If the rest of the world is running an overall deficit with Germany, this means that it is accumulating debt, funded by Germany lending its net savings, or the savings that are not invested domestically.
I have discussed these matters in previous posts, but the article cited above makes a useful point. The potential for reducing the German current account surplus is being played out as a conflict between economic and institutional forces. Continue reading
Professor Barry Eichengreen writes in The Guardian on the unbalanced German economy, which I have posted on many times. As he says, the country’s large current account surplus reflects the excess of domestic savings over investment, as a matter of accounting. But he puts this down to an ageing population prudently saving for retirement, so does not see any medium term reversal of the household sector’s resulting financial surplus.
What he does not mention is the large net savings of German companies. To put it another way, corporate savings, or retained earnings, are larger than corporate investment. Rebalancing the German economy, and arguably restoring much greater prosperity to the EU and the eurozone, requires an increase of investment relative to savings. This an either be accomplished by consumption rising and the savings rate falling, the investment rate rising, or some combination of the two.
Although it is widely believed that Germany is an economic success story due to its successful exporters and low unemployment, its imbalances are a problem for Europe and the rest of the world economy. Continue reading
A bleak picture painted of the UK economy by the latest piece from the Socialist Economic Bulletin:
According to Tom O’Leary the underlying aim of austerity has been to restore business profits, by putting downward pressure on wages, and reducing taxes on business and the rich. But while wages have stagnated, profits have not recovered significantly. As profits lead investment, growth in the latter has been weak, and the basis for an improved growth performance and living standards has so far failed to materialize.
Those on the right would respond to this by engaging in deregulation and further austerity, which might include reducing workers’ rights and environmental protections, and deepening cuts in public spending and taxes. Such policies would be short-sighted and damaging. Those on the left would favour a large increase in public investment in order to ‘crowd in’ private investment. This could be far more beneficial, as growth in public investment has been weak for years, while the burden of regulation remains relatively low internationally. But at the moment the UK has an unassailable right wing government too distracted by Brexit to engage in such a progressive agenda. Continue reading
Oxford Professor Simon Wren-Lewis blogs here that UK households are set to lose out from the effects of the vote for Brexit over the next few years due to slowing growth in overall income. This is according to recent Bank of England forecasts for the UK economy.
While overall growth in GDP is forecast to be relatively strong compared to other rich nations, average growth in household income may be zero or even negative during this period.
This is due to the sharp fall in the value of the pound, which makes imports more expensive, and is already contributing to a rise in inflation.
Higher inflation means that a typical consumption basket is more expensive than otherwise, and this reduces real household incomes, other things being equal.
But the fall in the pound should have other effects on the economy. Continue reading
A nice piece by the Guardian’s economics editor Larry Elliott on the seemingly neverending tragedy of the (lack of) progress of the Greek economy. As he describes, Germany is refusing to follow EU rules and reduce its large current account deficit by boosting domestic demand, which would help Greece grow, rebalance and reduce its debt burden alongside its mountain of unemployment.
In the absence of a eurozone fiscal union, which seems unlikely, Greece can only come out of its nightmare, with all the mass human suffering that entails, if the eurozone countries running current account surpluses change course. The current ‘reforms’ in Greece will not do the trick in the absence of changes in the macroeconomic environment created at least in part by the policies of its neighbours. This is not about the lack of economic solutions, but of political and popular will.
Here is what would surely be an appealing narrative for ordinary Germans: how would you like a wage rise, and better public infrastructure, with the knowledge that this would help not only your fellow countrymen but also your southern european neighbours and in the process reduce their debt burden without you having to bail them out any further? Sound good? With support for the right economic policies, this much is possible.