US Treasury versus Germany: New Controversies, Old Debates

You may have heard about the recent report by the US Treasury criticising Germany’s deflationary economic policies and their harmful effect on the global economy. And if so, you have probably also heard about the reaction that ensued on the part of the representatives of the German authorities, who retorted that there’s nothing wrong with Germany’s “growth-friendly economic and fiscal policy”. Indeed, according to the latter, Germany’s policies constitute a model to be copied by all, including in particular by deficit countries like the US.

My own contribution to this debate will consist of inviting the reader to travel back in time to the United Nations Monetary and Financial Conference which took place in Bretton Woods, New Hampshire, in July 1944. It was a watershed event, which lay the foundations of the global monetary and financial system for decades to come, including through the creation of such structures as the General Agreement on Tariffs and Trade, the International Bank for Reconstruction and Development (which would become the first of the World Bank Group institutions) and the International Monetary Fund. In addition to seeing the birth of what would become known as the ‘Bretton Woods institutions’, the Conference also became legendary in the field of economic history due to the debates between the British delegation, led by John Maynard Keynes, and the American delegation, led by Harry Dexter White. Both men would go down in history: Keynes as an intellectual giant and the ‘father of modern macroeconomics’, White for his ultimately victorious role at the Bretton Woods Conference, but in a strange twist a fate a few years later also due to having been exposed as a Soviet agent in the context of McCarthyism.

In any case, the crux of the disagreement between the British and American delegations concerned which mechanism should be put in place to govern the international financial system and, in particular, to deal with international imbalances. White’s proposal was the one which was ultimately adopted: a fixed-exchange-rate currency regime and the creation of the IMF, tasked with providing emergency financial assistance to countries faced with balance-of-payments crises, under the proviso that these countries adopt contractionary policies aimed at curbing their imbalances. By contrast, Keynes advocated the creation of an international clearing union and international unit of account (the “bancor”), and he wanted the burden of adjustment to be shared by deficit and surplus countries alike: deficit countries would be required to curb demand, but surplus countries would be required to use their surpluses to increase their demand for other countries’ exports. This was built on the acknowledgement that a country’s surplus is, by necessity, another country’s deficit – and on the idea that addressing international imbalances through forcing contractionary policies on one of the sides of the imbalance alone has an overall depressive effect on the global economy. By virtue of political economy (the strength of the creditors’ interests) rather than sensibility, the American proposal won – and that is why throughout the last few decades we have seen IMF delegations imposing austerity, privatisation and deregulation in crisis-ridden developing countries, instead of seeing them confiscate a share of China’s or Germany’s trade surpluses and injecting them back into global demand as Keynes would have had it.

So you see, this most recent of controversies has its roots in a debate that stretches well into the past. It’s not hard to see who’s on the side of reason here: Germany’s policies are not an example to be copied by all because, by definition, not every country in the world can be a surplus country; and its current account surpluses are not “a sign of the competitiveness of the German economy and global demand for quality products from Germany”, as the German authorities have sought to suggest, because, for any level of exports, Germany could have a balanced current account as long as it did not also have an excess of output over spending. The criticism by the US Treasury is therefore entirely to the point. However, it also comes tragically and ironically late: late by about 10 years if we consider the origins of Germany’s ‘wage restraint’ policies; late by about 70 years if we consider what the American delegation stood for at Bretton Woods, and what that meant for the functioning of the global economy in the decades that followed.

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