G-20: Beware of protectionism and devaluation
Europe wants to be China, but with US salaries and privileges. And that does not work
Protectionism Teaches us to do to ourselves in time of peace what enemies seek to do to us in time of war – Henry George
The G-20 summit last weekend was good fun. Taking inspiration from that annoyingly familiar Shaggy song, ‘It Wasn't Me’, everyone denied any existence of currency war or protectionism. But concerns about rising intervention are not irrelevant when economies are shrinking, as data shows in Germany, France or Italy, or in exhaustion, as we saw with industrial production in Brazil or Mexico.
Exports were supposed to get the Eurozone out of crisis. Yet, victim to currency wars, they fell to the lowest levels of the last five months in December (-1.6 percent). Germany, -3.4 percent month-on-month; France, -1.7 percent; Italy and Spain, flat.
"I do not hear anything but devaluation, distrust and interventionism." These are the words of a former Citadel colleague who lives in Moscow and was invited to the G-20 meeting. "Nobody trusts anyone. All countries want others to stop intervening, but to keep doing it themselves."
What about the much trumpeted "free trade" agreement between the US and the EU announced by Obama? Well, I have my reservations:
- Because what is hidden under the headline is bilateral protectionism, and the other governments of the world, where our exports and the energy we consume come from, will not easily agree.
- Because it impoverishes developing countries, who are the future of such exports. Ruining your customers is never a good policy.
- Because history has shown that bilateral agreements between interventionist administrations never bear fruit because both parties want the same; realities for me, promises for you. The Obama administration and the European Union have quadrupled their trade restrictive measures during the past seven years, and the two sides need the weakness of the other to cover the hole of de-industrialization that we discussed here. A hole that was created precisely because of interventionist and restrictive measures, but governments refuse to admit it.
Citizens are frightened by the crisis and put too much faith in obese and incompetent governments to fix things quickly.
We protect at home, defend our acquired privileges, and want to export our way out of the crisis, selling to the same countries that we weaken with restrictions ("protect at home, stay open abroad" as the World Trade Organization warned). We want to be China, but with US salaries and privileges. And that does not work.
According to the Nielsen institute, 40 percent of the European population defends actions to restrict imports from abroad. We all know how this race ends, but scared citizens demand the same mistakes of the past: competitive devaluations, protectionism, and mutual accusations. Back to 1930.
This masks the problem of countries that are losing competitiveness as the weight of the state absorbs more than 50 percent of the economy and as a result, debt soars. It is no coincidence that the most indebted, with highest government spending, "demand" that their model is financed for free. But remember, "everyone wants to live at the expense of the state, but they forget that the state lives at the expense of everyone", as Bastiat said.
Instead of understanding that we create structures that consume more than they produce, and whose marginal productivity worsens, we seek to protect the "welfare of the State".
As predicted, the conclusions of the G-20 were that there is no currency war and countries should not put up barriers to world trade. And on Monday everyone is back home again trying to devalue and restrict.
Protectionism is denying reality
A highly productive economy survives and thrives in globalization. Winners sell even in protectionist countries. Do you see high-tech companies and high-added-value sectors, not dependent on subsidies and the state, worrying about restrictions in some countries? No. Unfortunately we ignore high-added-value and are determined to get the last drop of blood out of an obsolete global industrial model.
If all states want to fight to defend their share of the crumbs making cheap cars, aluminium plates, bricks, grinders or plastic tubes, the race is toward zero. They never win. It masks the reality, but governments then create more and more committees to regulate.
Trying to protect declining industries and sectors makes it impossible for developing countries to grow. We are so arrogant and greedy, adding debt and devaluing, or subsidizing farmers not to produce, that we let inflation and poverty sink our neighbours. Then we send in a bunch of NGOs to study the problem.
But yes, sure; we will "export our way out of the crisis."
Protectionism and intervention are the problems. Myopic governments that know only how stop to stop, regulate, and hinder, never facilitate.
Global currency wars
High-productivity economies survive a strong currency; low-productivity economies cannot survive even with a weak currency.
Central banks have always denied currency wars. Like the kid who is caught doing a prank, they will always deny any culpability. But if you think the other G-20 countries will stay quiet after the empty statement this weekend, and will not do the same – that is, devalue and restrict – think again.
How can we believe that countries that have increased their restrictive measures in growth periods will avoid doing it during a crisis? Everyone knows it's a lost battle in the medium term, but despite the empirical evidence (read ‘This Time Is Different’ by Ken Rogoff), they prefer to carry out ‘shock’ measures that give the appearance of ‘action’ and ‘protection’.
Devaluation is an excuse to keep political spending and does not solve a low margin production model. It is an atrocity that creates inflation, impoverishing citizens, and transfering income of workers and savers to the government and declining sectors, enriching only a few because of rising asset-inflation-risk; in other words, the false illusion of economic growth.
More government and devaluation? Disaster
In this situation, the model we see proposed by European "civil platforms" and socialist economists is in Latin America: More public expenditure, a state-controlled social model, and devaluation. Chavez without oil.
Devaluations such as those seen in Venezuela or Argentina are not the result of currency wars or speculative attacks. Chavez has made four devaluations since he has come to power because of his excessive spending, which has wiped out the balance sheet of its national oil company PDVSA in "social projects" (11 billion a year), making it the world's most indebted oil company.
Fake currency and spending while emptying the country's coffers has not improved a country ravaged by inflation of 22 percent and a black economy.
In Argentina, subsidized employment, intervention, and massive currency devaluations have led inflation to soar to 27 percent. In 1997, public sector employees numbered 720,000; by 2011 that figure had increased to 1.5 million, more than double (source: Idesa). Spending in the hypertrophied state is out of control. "Domestic demand" they call it; a true "success".
...And these countries have oil.
In Europe, in order to export any goods, we must import energy and commodities, and devaluation makes them expensive. The questionable short-term positive effect dissipates in the medium term.
If all the countries intervene, the global economy stagnates. Velocity of money, which has plummeted, will collapse, and investment with it. Few invest in long-term projects under such uncertainty. Indeed, if devaluing and intervening was the solution, Venezuela, Argentina, or Zimbabwe would be the kings of the world.
I look forward to the next G-20 statement denying currency war or protectionism. Remember, just as Shaggy said, ‘It Wasn't Me’.
Daniel Lacalle is a Fund manager. Voted Number 1 Pan-European Buyside Individual in General and Oil & Gas categories in Thomson Reuters' Extel Survey 2011. He is a contributor to El Confidencial, where this article was originally published in Spanish
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