Cutting the North’s current account surpluses won’t help the South

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Relaxing wage restraint in North European countries is not a solution for the economic problems of Southern Europe. Structural solutions are the only way out, writes Raymond Gradus.

Raymond Gradus is a professor of economics at VU University Amsterdam. He is also a board member of the Centre for European Studies and director of research at the CDA Research Institute. The views expressed in this commentary are his own.

"?Some politicians stress that substantial current account surpluses – especially in Germany – may be deemed as harmful and, therefore, require correction. A similar argument is put forward for Finland, Luxembourg and the Netherlands.

However, it is crucial to take a closer look at the source of those surpluses. If they arise because the country has acquired a competitive edge through clever structural policies, a good education system and wage restraint, then this can hardly be blamed on the country. Forcing countries to give up those policies would go against the principle of following best practices.

If we think of Northern Europe as running current account surpluses and Southern Europe as running current account deficits, it is in any case very doubtful that punishing the former group would solve the imbalance problems of the latter.

One reason is that both regions trade with other countries both within and outside the eurozone, such as Asia and America. More importantly, it denies the fact that the source of Southern Europe’s current account deficits is the lack of competitiveness, partly because of badly functioning labour and product markets. A best policy would be to apply EU enforcement on countries for following the wrong policies leading to imbalances.

Here, one should not only think of market reforms of labour and product markets, but also of regulation and supervision of the financial sector, as long as this remains a national competence. In an ultimate state, the European Commission could be given the possibility to adopt recommendations and correct the imbalances.

Last week, in a plan to deal with the euro crisis, László Andor, the EU commissioner for employment, inclusion and social affairs, stated that wage restraint in Northern Europe should be relaxed.

However, this is not a good advice either. First, I do not think that politicians should intervene in the negotiations between employers and employees. Second, loosening wage restraint in Germany, for example, will offset parts of its competitiveness advantage at a time when the world economy and especially Europe's seems to be recovering.

Third, loosening wage restraint will not solve the imbalances problem between Northern and Southern Europe as both regions also trade with other countries within and outside the eurozone.

The only way out of the euro crisis is sound public finance and clever structural policies, especially for Southern Europe. A stimulus package and loosening wage restraint in Northern Europe will not help these countries."

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