What Asia can learn from Europe’s experience
Which country fits the following description? The government is running a large and widening current-account surplus. Annual growth has accelerated sharply. The central bank targets the exchange rate. Wage pressures have been building up. The political class, under pressure from the business lobby, resists change. “As long as I am in charge, there will be no revaluation,” the country’s political leader has announced.
That country is not China today, but West Germany in the late 1960s. The leader was Kurt Georg Kiesinger, who headed Germany’s first left-right grand coalition. He kept to his promise not to revalue, but only because he was voted out of office in 1969. Shortly afterwards, Germany revalued the D-Mark and started a process to restore imbalances that had been building up over the years.
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There are some interesting parallels between Germany then and China today. There are also obvious differences: China has a large population, a relatively low level of development, a large reservoir of domestic labour, artificially low prices of land, water and energy and no independent central bank. Furthermore, in China no one gets voted out of office for refusing to revalue. But there are some experiences of postwar Europe that are applicable to Asia in general and to China in particular.
Lorenzo Bini Smaghi, a member of the European Central Bank’s executive board, raised this issue at a recent conference in Beijing of the Asia-Europe Economic Forum, a group of Asian and European economists. He stopped short of calling on China to revalue against the dollar. But he did say that “emerging Europe” converged towards a policy consensus
