Two recent statements by Irish government ministers deserve to be quoted at length, since they illustrate very nicely two of the broader threats to the international economy going forward.
On Sunday, Willie O’Dea wrote the following passage, which will have seemed somewhat familiar to readers of this website:
We tried the fiscal stimulus approach in response to the oil shock in the late Seventies. The increased spending power given to the Irish consumer largely leaked out on increased imports and left us in an even worse position. There is absolutely no evidence to suggest that the same thing would not happen again…From Ireland’s point of view, the best sort of fiscal stimulus are those being put in place by our trading partners. Ultimately these will boost demand for our exports without costing us anything. What we need to do is to ensure that we are well positioned to avail of the opportunities that result from our trading partners’ actions.
This is precisely the problem that Martin Wolf, Dani Rodrik and others have been highlighting recently: governments worried about this leakage abroad may well combine fiscal stimuli with import restrictions (governments bigger than our own, that is). The obvious solution is to have a coordinated fiscal reflation, and in that light the fact that the G-20 is meeting in London in April is obviously positive. Unfortunately, the history of the 1930s suggests at least two reasons for caution here. The first is that leaders then also realised that cooperation was in principle desirable, and organised a World Economic Conference in London in 1933. That conference failed. The second reason for caution is that one reason why cooperation was so difficult to achieve was that leaders in different countries disagreed about what the economics of the situation required. Notably, the gold bloc centered around France continued in its orthodox gold standard beliefs until 1936. It is crucially important that the Germans today abandon their resistance to Keynesian solutions to the Keynesian crisis we find ourselves in (which may in fact be gradually happening, as the bad news in Germany continues to mount up); and that the ECB be as proactive as the Bank of England and Fed, and as open to the possibility of quantitative easing.
The second Irish ministerial statement that has historical resonances is that of Brian Lenihan quoted this morning. He apparently said:
It is a question for all of us in the EU as to the extent to which a competitive devaluation can be used as any kind of a weapon…The fall in sterling is causing us immense difficulties…They have in effect produced a devaluation of the pound through expansion of the money supply. That has put us under immense pressure
History shows that exchange rate misalignments have been one of the most common reasons why countries resort to wholesale protectionism. The French-led gold bloc of the 1930s found itself with a progressively more and more overvalued currency, as other countries abandoned gold and cut interest rates. Its response was to impose far more stringent import controls, in particular quantitative import controls, than comparable economies elsewhere. The question today is what an undervalued remnibi, or an overvalued Euro, or other similar misalignments, could imply for global trade policies going forward.
Within Europe, the current decline in sterling, if unchecked, will provide future scholars with a fascinating case study. Recall that one of the main arguments for EMU in the 1990s was that the Single Market would in the long run not survive fluctuating exchange rates between EU member states — this was Barry Eichengreen’s view, for example, expressed in the wake of Hoover’s decision to transfer a plant from France to Scotland. I was sceptical at the time and still am; the shared political commitment to the European acquis can’t be overestimated. But there is no doubt that Ireland is incredibly exposed, and that we urgently need the ECB to match whatever is being done in London and DC. Time for a helicopter drop of Keynesians over Franfurt?
4 replies on “Irish canaries in the global coalmine: the threat to international trade”
Kevin. You point to one side – the possibility of fiscal co-ordination, and don’t ask about the strength of the global trade consensus. One of the differences between now and the 1930s is the absence (yet) of any serious threat to the progress that has been made in global trade liberalisation over the last number of decades. One reason is because of the emergence of very strong regional trade agreements, the EU being the most successful example (so multilateral and regional trade agreements are friends after all). Which brings us to fiscal policy. Surely countries like the UK would have to leave the EU (not just the WTO) to protect against free riders like Ireland? The ‘raising the draw bridge’ assumption made in this hypothesis don’t seem to be realistic given the timescales involved.
Kevin: You examine one side of the argument (fiscal co-ordination) and not the other (strength of free-trade institutions). Free trade is a big difference between now and the 1930s. There has been no serious public debate to the effect that the current malaise is in some way caused by free trade – or that less free trade would help – an absence which in itself is notable. Amongst the many reasons for this consensus is the growth in regional trade agreements, the EU being the most successful example (so multilateral trade agreements and regional trade agreements are friends after all). To protect aganist free-riders like Ireland benefitting from their fiscal expansion, the UK would probably have to leave the EU, not just the WTO. The timescales involved would suggest that this is just not going to happen. A postscript of this crisis might be that it represented a shift in the mindset of the public in terms of their perceptions of globalised trades. (apologies is this post appears twice).
Given the current juncture and the desirabilityof co-ordinated responses advocated, how would “quantitative easing” in the euro area actually work? Given the significant role the Treasuries appear to be taking in “monetary policy” in the US and UK as interest rates move toward zero, does the spectre of additional co-ordination difficulties loom large for the Eurogroup in this context? Or areTreasuries doing “monetary” any easier to co-ordinate than them doing “fiscal”? Any historical precedents?
Ronnie: I don’t believe in economic predestination, and nothing is inevitable. Indeed, the current crisis could strengthen the political commitment to multilateralism, just as it is strengthening the intellectual case for it. On the other hand, the crisis is superimposed on a situation where OECD workers already feel that globalization is hurting their job prospects through trade and outsourcing; where people in places like Germany are increasingly (and rightly) angry about tax havens; and so on. So nothing can be taken for granted. The point of the post was that at the international level, getting the macroeconomics right is going to be very important for the international economy going forward (obviously our own government’s behaviour is irrelevant to that broader context, I just thought that those statements were nice illustrations of forces at work in countries that actually matter).
Danny: your question about the politics of Euro-area quantitative easing is a good one, and I’d let the monetary experts answer it. But yes, I can see it being difficult. One plausible scenario is surely that this crisis will prompt a move towards much greater fiscal centralisation in the Euro area, perhaps for this reason and probably for other ones also. More broadly, I guess that in a floating rate environment, it should be easier to have everyone move rapidly towards the required monetary policy than to get everyone doing what is needed fiscally; since while your fiscal expansion benefits me, and perhaps gives me an incentive to free ride, your monetary expansion hurts me through the exchange rate channel, and gives me an incentive to follow suit.