We Are All Greeks


Rebalancing the world economy: EU-China trade deficit
Image by European Parliament via Flickr


I bought some wrapping paper a couple of days ago. It was made in China.

Yes, our economy has sunk so low that it is cheaper to make wrapping paper in China and ship it half way round the world than it is to make it here.

Most people, I think, understand that by buying foreign products we are exporting British jobs. But I suspect few understand how very much damage is being done to our economy and our future way of life.

I believe in free trade. It makes everyone richer. That has been very clear from the earliest days of the study of economics. Unfortunately, the benefits of free trade can only be properly felt by everyone if all sides are committed to it. The Chinese are not.

The Chinese peg their currency to the US dollar. They made great play a few months ago of allowing the currency to move a couple of percent against the dollar – when a free market value would move the currency by perhaps 50 or even 100%.

They impose huge duties on imported products like motor cars. As a result, Western auto manufacturers are obliged to set up local production facilities in China.

Even that is not enough for the Chinese. They have rules that prevent Western companies owning Chinese ones. That means those local production facilities have to be joint ventures with Chinese companies.

All this is not a free market. It is crude mercantilism, of the kind that Britain used to practice in the days of the Empire.

Western politicians, especially American ones, have been pretty loathe to speak out. Why? The answer is government debt. The other side of those big trade surpluses run by the Chinese is that they have been using the money to buy enormous quantities of US Treasury bills. They therefore have a very great hold over American political leaders. There is a ghastly symbiotic relationship between them.

The Chinese fund the deficits with which Western politicians buy the votes of their people, and the Western politicians keep quiet about China’s undermining of Western economies. It is a very dangerous game they are playing, because such imbalances in the long run will, and indeed already have, destabilise the world economy, and could lead in the long run to serious conflict.

Now take a look at Europe. The situation here is a microcosm of the world economy. In Europe, it is Germany who run the surplus, and countries like Greece (and Britain) that run the deficit. Greek politicians have been buying the votes of their people with borrowed money. The Germans (and the French) have been lending, and also running big trade surpluses. The Germans have become addicted to exporting, just as the Greeks (and the British) have become addicted to debt.

In the case of Greece, the currencies are even artifically fixed by the existence of the Euro, just like the Chinese currency is artifically fixed against the US dollar. That makes German exports look cheaper than they should be if you are Greek.

Germany is not like China. Germany has no agenda to undermine the economies of the Southern European countries (or indeed of Britain). But the policies, and the effects, are the same.

In Europe, the answer is clearly to break that currency union, by eliminating the Euro, and for Germany to boost the living standards of its people by cutting interest rates. Germany needs to break its addiction to exports, just as Greece and Britain need to break their addiction to debt.

Worldwide, the problem is really the same – and the answer is the same. The link between the Chinese currency and the US dollar needs to be broken, and the Chinese need to stop imposing restrictive trade practices on trade with the West. That is not to say that it is all the fault of China. It is not, because the Western addiction to debt is the other side of the coin.

We can all see where the problem in Europe has led Greece. The consequence of the Western problem with China will be the same unless the Chinese problem is resolved. This time we in the West will all be playing the role of Greece.

We are dismayed by the spectacle of Germany turning the screws on Greece. China will be doing the same to us shortly unless our politicians start tackling the fundamental issues.

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