Causes of Global Imbalances

All week we have heard about the need for more monetary and fiscal union in the EU in order for the Euro to work. Another key point repeated is that global imbalances must be checked: ‘surplus’ countries (those that export more than they import, like Germany) must increase domestic demand of goods produced by deficit countries (UK, France, etc), and the latter must focus on reforms that will allow their economies to become more competitive.

Yet the reforms we then hear about are different types of cuts, rather than spending. This makes little sense as the surplus countries have become surplus not by old style devaluation, or protectionism, but by their ability to produce knowledge intensive competitive products. A fruit not of their ‘austerity’ plans but of their spending in the right places.

Take Germany and China, the surplus countries most commonly named. They export more than they import because the world wants their products, as was recently witnessed in the UK when a German train manufacturer (Siemens) won a UK government procurement bid for green fast trains[1].

Germany and China have high R&D/GDP ratios, and are targeting it on up and coming sectors (yes, ‘picking’ them), such as green technology, which is surely going to be the ‘next big thing’ after the internet[2]. Currently risky, but with huge potential commercial returns down the road. And this spending means that they will continue to be surplus countries, as will countries like South Korea which in July 2010 announced that it would double its spending on green research to the equivalent of £1.9 billion by 2013 (almost 2 per cent of its annual GDP), which means that between 2009 and 2013 it will have spent £59 billion on this type of research[3].

So what is the solution? A common EU fiscal policy that sees EU countries becoming more competitive, producing more products that the world, including China, wants to buy. This will mean not just ‘reforms’, but spending on a Green New Deal, as many of us have been arguing for, as in the Plan B launched today by UK economists[4].

It is a myth that there is no money. Companies are hoarding cash, and the public sector can ‘create money’ which as long as it produces growth (which green tech will) will not produce inflation. This is much better than quantitative easing, or different types of ‘bailouts’, which simply end up in the coffers of banks, which have no intention of lending, or engaging with the ‘good’ type of risk that creates new products, processes and markets.

[1] For details see my blog

[2] For figures on spending on green technology by country, and how this is linked to industrial policy, see Mazzucato (2011) The Entrepreneurial State by DEMOS

[3] PIRC, The Green Investment Gap: An audit of green investment in the UK, Machynlleth: Public Interest Research Centre, March 2011.

[4] Plan B:
for pdf Plan B document go to: