From the TUC

Imports, exports and fiscal stimuli

28 Jul 2009, by in Economics, International

In today’s Financial Times, Ralph Atkins reports that Peter Bofinger, economics professor and a top adviser to the German Government, has warned that Germany is pursuing a dangerous strategy in assuming a pick-up in world growth with restore the health of its export-driven economy.

Bofinger argues that France, the eurozone’s second-largest economy, is performing better by adopting “an approach that was more balanced, so that domestic demand increased with GDP.”

Such warnings are not new. German gross domestic product is expected to contract by as much as 6% this year – much faster than the US economy – and other export-led economies are also struggling. With less money going around and low consumer confidence, people are simply not buying the products that Germany and others rely on exporting.

The UK has a different problem. Our decades-long trade deficit means that we don’t reap the benefits of exports that have made Germany strong for sixty years. Today’s launch of the Government’s Advanced Manufacturing report may make a small contribution to addressing that problem, but overcoming it will require a long-term effort.

Yet the case for balance, made by Peter Bofinger, is compelling. To be sure, Germany will enjoy great success from its exports for many years after this crisis has passed, but boosting domestic demand would give it an extra tool in its armoury. One way to do this would be to reduce the emphasis on wage moderation that exists in German society. A little more money in the pockets of the man and woman in the street would boost demand and help hard-pressed German companies.

That’s true for the UK as well. It’s the reason the TUC strongly opposes talk of spending cuts at this time. With weakened consumer demand, cuts could prolong the downturn, or even make it worse. In November, when the Pre Budget Report comes around, the case for an additional fiscal stimulus will be discussed. If this could be used to boost the UK’s never-known-to-be-generous unemployment benefits, to give just one example, it would help in the fight against poverty, provide greater social justice and give the economy a boost, all in one fell swoop.