Mercantilist futility

The European currency board is currently squabbling. It has a set inflation rate target, the idea being that inflation will help to reinvigorate the sluggish economy of the Eurozone. With a rise in inflation due to higher energy prices, the target is on the way to being reached, though it is not clear how higher energy prices will stimulate the economy.

Underneath all this is a set of trade and economic policies which should, in the twentieth century, never have seen the light of day. German banks have had to lend to other Eurozone countries in order to maintain demand for German products, but they now hold vast amounts of urepayable debt.

Germany has the supposed advantage of a currency that is undervalued (for them) by at least 10%, possibly more. In reality, of course, it is a disadvantage. It means that Germans are working at least half a day a week for nothing. German workers are, literally, being short changed. What will happen when they notice?

How has this situation arisen? EU and Chinese economic policy is based on the conception of trade and economics known as “mercantilism”, which held sway in the seventeenth century. The underlying principle is that the aim of economic policy should be to bring money into the country, for example, by importing gold and silver, as the Spanish and Portuguese did. It was ultimately their downfall. They had devoted vast resources to shipping precious metals across the Atlantic. But this proved to be a futile effort; gold cannot be eaten, or used to for shelter, or fuel, or worn to keep out the cold. All that happened was that prices rose. Nowadays, mercantilist policy concentrates on exporting as much as possible and thereby maintaining a persistent balance of payments surplus.  In its modern incarnation, it has left the German banks full of worthless paper.

Mercantilist theory had been refuted several times over before the eighteenth century was over but it survives in a zombie-like after-life in the minds of those responsible for making economic decisions at the highest levels.