Isn’t it amazing that almost at the same time as the future president of the United States is sending blatant threats across the Atlantic regarding Europe’s current account surpluses, the European Commission and the most important national governments in Europe have hardly any other topic on their agenda than improving international competitiveness. The report by Mario Draghi (available here) for the EU Commission is the ultimate proof of the European obsession with competitiveness, which began at a summit in Lisbon in 2000.
In the Draghi report and among the interested public, the lack of competitiveness is discussed almost exclusively on the basis of examples from certain industries that are thought to have fallen behind, especially compared to the US. Digitalisation in general and AI are, of course, the most frequently mentioned buzzwords. But no one asks what goal we actually want to achieve.
Does Europe want to increase its surpluses even further?
Despite all the repeatedly cited European deficits, the USA today has a very high current account deficit (overall and vis-à-vis Europe). This is precisely what the incoming American president is complaining about, because he associates it with deindustrialisation at the expense of the USA. Consequently, the focus of the European discussion on competitiveness is more than questionable. If Europe were to catch up with or without government help in the areas that are repeatedly mentioned, this could only mean that the European surpluses would increase even further. Trump would then react even more harshly with tariffs or other measures. However, in that case all the efforts of the Europeans would have been pointless from the outset.
These considerations apply particularly to Germany, whose huge current account surplus of 7 per cent of GDP is largely responsible for the European surplus. Does Germany want to sacrifice traditional industrial sectors for the new sectors? The attempt to become a world market leader in all sectors can never succeed. We should be glad that the US is leading in some areas of information technology. Surpluses are not justified under the rules of the World Trade Organisation and with extensive free trade, contrary to what the Europeans would have us believe. A country with high surpluses should not, under any circumstances, attempt to improve its competitiveness further.
Everyone can become more productive – but how?
Of course, and this is also occasionally mentioned in the Draghi Report, one can be of the opinion that the Europeans should become more productive, quite independently of the question of competitiveness, and that the American model sectors are particularly suitable as a model for a strategy to increase productivity. But this should also be clearly stated to the Americans, and it should be made clear that there is no intention of attacking the market share of American companies in this way. The term ‘competitiveness’ should not be used for such a strategy.
But anyone who complains in general terms about weak productivity in Europe needs to analyse the situation much more thoroughly than Draghi. His report is based mainly on microeconomic analysis and case studies. But that won’t get you anywhere. When a continent fails so miserably in macroeconomic terms as Europe (as recently shown here), it’s no wonder that investment activity suffers and with it productivity. To conclude from the lack of investment momentum that one has not chosen the right companies or the right future fields is a fallacy of the first order. Only if Europe had a similarly good overall economic development to the US but still fell behind in terms of productivity could one conclude that Europe is following the wrong microeconomic strategy.
The confession of failure
As soon as the Draghi Report reaches the macroeconomic level (after more than 250 pages of very tedious reading!), however, it makes two serious mistakes. Firstly, Draghi tries to explain the European current account surpluses with the savings behaviour of Europeans. Secondly, he attributes the low level of investment in Europe primarily to the inefficiency of European financial markets. Both theses are untenable.
On pages 280 and 281 of the report, we find the following two crucial sentences:
In the EU, productive investment is low and private sector saving is high, contributing to a substantial current account surplus.
The failure of high EU savings to flow into productive investments in Europe comes down to less efficient financial intermediation.
These attempts at explanation are, to put it mildly, medieval. The first thesis, that relatively high savings lead to current account surpluses, is, as shown in great detail here and in my new book, the misinterpretation of an identity – albeit a common one. The counterargument becomes immediately obvious when one realises that national or regional current account balances are zero-sum phenomena, because the world’s current account balance is always exactly zero. Zero-sum phenomena, however, can only be explained by factors that are themselves zero-sum phenomena, such as changes in exchange rates or changes in the terms of trade. Global savings behaviour is not a zero-sum phenomenon.
The second thesis is at least as absurd as the first. One wonders why the US, despite being blessed with tremendously efficient capital markets, needs huge government deficits to close the demand gap created by the (relatively low compared to Europe) savings. Only a consistent analysis of sectoral net lending or net borrowing can provide relevant answers here. Draghi is apparently not familiar with this tool.
In the US, too, companies are on balance savers, which clearly shows that the issue is not efficient financial intermediation, but how to get companies to resume their role as the economy’s most important borrower (as shown here). Financial intermediation and extremely low interest rates have failed miserably in this task. That is why the US government had to step into the breach to keep the economy running. Not to have seen or understood this is an admission of failure on the part of Mario Draghi and the entire team that helped him prepare the report.