A fiscally neutral revaluation is achievable
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