A fis­cally neu­tral reval­u­a­tion is achiev­able

Financial Times USA - - LETTERS -

Sir, Martin Wolf (Com­ment, May 17) high­lights the neg­a­tive in­flu­ence of Ger­many’s large cur­rent ac­count sur­plus on the euro area. And as Mr Wolf has high­lighted else­where, a euro area seek­ing to imi­tate Ger­many’s sur­plus in the ag­gre­gate is a ma­lign in­flu­ence on global de­mand growth. Mr Wolf ex­presses the doubt, shared by many, that the in­crease in Ger­man wages needed to re­align its com­pet­i­tive po­si­tion will oc­cur.

One mech­a­nism which could be used to pro­mote such an ad­just­ment is a fis­cal reval­u­a­tion; this would see Ger­many raise em­ploy­ers’ so­cial charges while re­duc­ing taxes on con­sump­tion (such as VAT). Such a pol­icy could be de­signed to be fis­cally neu­tral. One could imag­ine a Ger­man reval­u­a­tion be­ing ac­com­pa­nied by moves in the op­po­site di­rec­tion by countries tend­ing to a bal­ance of pay­ments deficit at full em­ploy­ment. Countries such as Greece and Por­tu­gal have al­ready been pres­sured into such steps, rais­ing VAT while re­duc­ing em­ploy­ers’ so­cial charges.

Although fis­cal at­tempts to ap­prox­i­mate the im­pact of nom­i­nal ex­change rate change are far from a per­fect sub­sti­tute, em­pir­i­cal ev­i­dence has sug­gested they are ef­fec­tive. The cru­cial step for the euro area, how­ever, is to recog­nise the need for sym­me­try in ad­just­ment. Ger­many needs to recog­nise that rates of unit labour cost growth run­ning per­sis­tently below the Euro­pean Cen­tral Bank’s near 2 per cent nom­i­nal norm for the re­gion are a prob­lem re­quir­ing correction, just as much as those that had run per­sis­tently above it. Mal­colm Barr Se­nior Western Euro­pean Economist, JPMor­gan, London E14, UK

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