The term "beggar-my-neighbour" strategy describes a situation where a nation pushes its excess supply onto its trading partners is more applicable to Germany than China in the current situation.
Answer: True
The answer is True.
Beggar-thy-neighbour policies are taken to mean that one nation explicitly follows a policy that will hurt another nation. The terminology is an artefact of the gold standard convertible currency era where deficit nations were disadvantaged because to manage the parity they had to use adjustments (contractions) in the domestic levels of activity (output and employment).
Chronic deficit ountries then had various ways of minimising the damage of the domestic contractio and shift aggregate demand away from imports toward domestically-producing substitution.
Various import substitution policies (tariffs or quotas) were common and often justified by the so-called infant industry argument, whereby protection was held out to be a medium-term strategy only while the nascent industry develop economies of scale and could compete in an open market. The problem (the topic of another blog) was that the "baby hardly ever grew up".
Governments were reluctant to push domestic wage levels down during this period although the business sector was continually demanding they do just that - more to garner a higher profit share than for the external competitive reasons they used to justify their demands.
But it remained that chronic deficit countries during this period enjoyed slower real wage growth and so there was an element of austerity endured in that respect.
The other major policy open to governments under fixed exchange rate system was subject to IMF approval (post World War 2) a government could devalue (or revalue) - that is, change the fixed parity they had to defend. The slight flexibility in the monetary system led to what was known as competitive devaluations where a nation would devalue to its real exchange rate.
A series of competitive devaluations involving the UK and other nations in the 1965 as they struggled with domestic recession under the fixed-exchange rate system led ultimately to the collapse of the system in 1971.
So with that background the best answer is True.
When the EMU was established, the German government realising it had lost its exchange rate flexibility, as a vehicle to maintain external surpluses, embarked on an aggressive low-wage strategy to ensure the real exchange rate (the price level-adjusted nominal parity) was competitive and so they could continue to offer export prices that were more attractive that the other EMU nations. The so-called Hartz reforms were a central plank of this deflationary strategy.
More than 45 per cent of German exports are within the EMU. Exports to China, Japan, US, and the UK total about 22 per cent.
The Germans have always been obsessed with its export competitiveness and in the period before the common currency they would let the Deutschmark do the adjustment for them. With that capacity gone in the EMU arrangement, they pursued another strategy which was to deflate labour costs not via high productivity growth but rather by punitive labour market deregulation.
The Hartz reforms were the exemplar of the neo-liberal approach to labour market deregulation. The Hartz process was broadly inline with reforms that have been pursued in other industrialised countries, following the OECD's job study in 1994; a focus on supply side measures and privatisation of public employment agencies to reduce unemployment. The underlying claim was that unemployment was a supply-side problem rather than a systemic failure of the economy to produce enough jobs.
The reforms accelerated the casualisation of the labour market (so-called mini/midi jobs) and there was a sharp fall in regular employment after the introduction of the Hartz reforms.
The way in which the Germans pursued the Hartz reforms not only meant that they were undermining the welfare of the other EMU nations but also drove the living standards of German workers down.
So while the Germans were busily exporting into the EMU they were also undermining the capacity of those nations to continue purchasing those exports. The crisis in Greece and other smaller EMU nations is an example of the costs those nations are bearing because of the fixed exchange rate characteristics of that monetary system.
They now have to adjust via domestic deflation to bring imports down and maintain funding for their net public spending.
Some will say that China by deliberately selling its own currency and buying US dollars to promote a trade surplus is also engaging in beggar-thy-neighbour behaviour. The rumour is that the Chinese currency is perhaps 20-50 per cent undervalued, depending on who you talk to. So the Chinese government is effect "devaluing" its currency to retain a competitive edge.
The reason this is not an example of beggar-thy-neighbour behaviour is because its principle trade competitors are not constrained by a fixed exchange rate themselves. For example, the US can use domestic policy freely to counteract the demand-draining effects of the external deficit should it want to. Under the fixed exchange rate system that was not possible to any large degree.
This is not to say that the consequences of the external relationship between say the US and China is not without issues and costs. But the US government is not facing the same policy impotence that the external deficit countries faced during the convertible currency period.
The following blog posts may be of further interest to you:
That is enough for today!
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