Locally or regionally deficient investment can then be offset at full employment, if there are other parts of the world where desired investment exceeds saving. In principle, the free movement of capital can thus serve to ensure that saving (S) matches investment (I) in the global economy even when employment is high. The interest rate level on the global capital market is then the pilot that brings the global "S" and the global "I" into line. If the interest rate can reach the "correct" level, a system of flexible exchange rates and free movement of capital is compatible with global prosperity at high global employment. We speak here of a "Friedman world" (Friedman 1953). Another feature of this world is that fiscal policy can be designed in a decentralized, i.e., autonomous, way and can vary from country to country. If one country has a restrictive public debt policy and if domestic saving is thus structurally greater than investment, this does not represent any danger to full employment, since the national surplus of savings can be invested on the international capital market to finance the excess investment of other countries. This then also corresponds to an excess of exports as compared to imports, which compensates for the domestic aggregate supply surplus. As a rule, however the price paid for this form of savings surplus is that domestic (real) interest rates are lower than the (real) rates in the recipient countries of the excess savings.

On the other hand, another country may run high deficits, so that domestic saving is not sufficient to finance domestic investment. The excess investment will then be made possible by capital imports, accompanied by a negative current account balance. Interest rates in this country are normally higher than in the countries of origin of the foreign savings.

But what happens if the level of the global full-employment real interest rate is so low that, due to the zero lower bound for the nominal rate, it can only be achieved through inflation? We assume that the goal of price stability should be maintained. In Chap. 9, we argued for this goal on the basis of the connection between monetary stability and the stability of the open society. If, with stable prices, the global full-employment real interest rate is so low as to be unattainable, then we are in a world that we will call a "Keynes world" (Keynes 1936).

In the Keynes world, international coordination of national macropolicies is required. Before going into the Keynes world in greater detail, we want to recall the well-known fact that there has always been a reference currency in times of free movement of capital. In the period before the First World War, the reference currency was the British pound. In the period since the Second World War, it is the US dollar. Special rules apply for the country that controls the reference currency. It is, in particular, far less vulnerable than other countries to balance of payment crises, since there is no threat of its own currency being devalued against the reference currency. For the two currencies are one and the same. Of course, the country of the reference currency must preserve at least a certain degree of monetary stability. For its currency to discharge the function of reference currency, it is also useful for foreign investment to enjoy a high degree of security in this country. The pound before the First World War and the US dollar since the Second World War have more or less fulfilled these conditions.

It was understanding that international coordination could be needed that led to the international meetings of heads of state and government that have been held for decades now and that are known to the public nowadays as the "G7" (or "G8") and the "G20." But, up to now, the dichotomy between "Friedman world" and "Keynes world" that we have presented here is not used in international economic diplomacy.

International coordination of macropolicies must also, of course, encompass international coordination of fiscal policy. In the Keynes world, the fiscal policies in question run in two opposite directions. On the one hand, in the Keynes world too, there are constantly countries that have accumulated too much debt and hence run the risk of insolvency. In the view of many stakeholders in the global financial system, such insolvencies have to be prevented, in order to preserve the stability of the system. The traditional role of the IMF includes providing support in such cases, but also actively intervening in and monitoring countries. But sometimes support packages have also been put together that go well beyond the lending resources of the IMF. The Greek debt crisis is an example. Since the impending insolvency often escalates into a crisis situation in a matter of just days or weeks, it becomes the focus of public attention. The government of a country that finds itself in such a crisis has to commit itself to consolidating public finances, i.e., to imposing "austerity."

By contrast, the opposite international need for coordination, namely that which goes in the direction of more expansionary fiscal policy, is a slow-burning candle under the conditions of the Keynes world. There is no doubt that international pressure has sometimes led countries to pursue a more expansionary fiscal policy than they would have done otherwise. The means used to exert this pressure, however, are basically incompatible with the principles of free trade. We will come back to this matter later in the chapter. But there is often no general consensus that, on average, a more expansionary fiscal policy course should be pursued globally.

How can we explain this lack of consensus? To start with, there is already no consensus on whether we are in a Keynes world or in a Friedman world. Those who are inclined to view the situation as a Friedman world will not have any understanding for more fiscal expansion. They will tend to view low interest rates on the capital market as a consequence of central bank policy. And they will tend to believe that the full-employment equilibrium interest rate corresponding to current fiscal policy is higher than the actually prevailing rate. Conversely, those who take the view that we are in a Keynes world will regard much of what is officially proclaimed as the expression of a misguided austerity policy, which is partly to blame for the fact that many countries are far from full employment.

In principle, it can never be ruled out that the world will be transformed in the near future from a Friedman world into a Keynes world—or, conversely, that it will be transformed from a Keynes world into a Friedman world. Whether such a transformation goes in the one direction or the other depends in no small measure on the evolution of countries' fiscal policies.

When the overall situation of the global economy is so opaque, it is difficult to get countries like Germany or the "northern" eurozone countries in general to abandon their current fiscal policy. The latter can always argue that there is a high probability that we are in a Friedman world. In "normal" times, moreover, the need for action is not so urgent, so that there is also no hurry to find a consensus.

The result is an asymmetry in international macroeconomic cooperation. If we are in a Keynes world, the excessive public debt of certain countries leads to crises, the overcoming of which involves massive restrictions on the debt of the countries in question. But an expansion of the debt of countries with "healthy" public finances, which would be useful from the point of view of monetary stability and higher employment, cannot be implemented due to a lack of consensus. In a Keynes world, the useful shifting of public debt from the less competitive countries to the more competitive countries thus fails to take place.

The more competitive countries tend to see the world as a Friedman world. The less competitive countries tend to see the world as a Keynes world.

### 10.4 The Natural Rate of Interest, the Friedman World and the Keynes World

We can define a transitional zone for the risk-free real interest rate on the capital market. This zone consists of the range of real, risk-free interest rate levels at which a transition from the Friedman world to the Keynes world or a transition from the Keynes world to the Friedman world is to be regarded as a real possibility, such that people's thinking and actions adapt to the imminent danger or opportunity that such a transition represents. In this transitional zone, there will normally also be disagreement about whether we are currently in a Friedman world or a Keynes world.

Figure 10.1 provides a graphic representation of this idea. The red line represents the relationship between the global level of public debt D (plotted on the horizontal axis) and the equilibrium interest rate at (hypothetical) full employment. The latter is plotted on the vertical axis. As discussed in Chap. 2 on capital-theoretical foundations, we understand D as the independent variable and r as the dependent variable here. The natural rate q ("rho" in the graph) is located

Fig. 10.1 Friedman world or Keynes world as a function of global public debt. Source Authors' own presentation

where D = 0. At a high level of global public debt D, there is no doubt that we are in a Friedman world. At a very low level of public debt D, there is no doubt that we are in a Keynes world, since, due to the liquidity trap, central banks cannot lower the interest rate to the level required for full employment under conditions of price stability. As we have drawn the graph, q is in the range of the Keynes world: Full employment with stable prices is only possible, if global public debt is positive. Further up, there is the transitional zone, in which the transition from a Keynes world to a Friedman world or, vice-versa, from a Friedman world to a Keynes world is not unlikely. In this transitional zone, there is also no consensus about whether we are currently in a Friedman world or in a Keynes world.

Now, it is obvious that the position of the natural rate q is of great significance for the international coordination of economic and, especially, fiscal policy: The natural rate of interest is the point of intersection between the red D-r curve and the vertical axis on which the full-employment rate is plotted. At a constant slope of the D-r curve, the lower the natural rate is, the larger is the range of the Keynes world and the smaller is the range of the Friedman world. If, as we have argued in this book, there is a secular tendency for the natural rate of interest to fall, then there is also a secular tendency for the range of the Keynes world to grow and the range of the Friedman world to shrink. The need for international coordination of fiscal policy is thus growing.

## 10.5 Unilateral Action and the Rules of Free Trade

It has always been the case that the rules of free trade are not respected in their pure form. Tariff and non-tariff import barriers and conscious intervention in foreign exchange markets are of particular relevance here. Within the framework first of the GATT and then of the WTO, there were and are procedures whose purpose is to keep tariff and non-tariff barriers to trade in check and, if possible, to reduce them. We do not want to go into the details here. We should, however, recall the following point on which experts are agreed: The stronger the global economy, the easier it is to contain and to dismantle barriers to trade.

A second field of unilateral action is targeted intervention in currency markets by central banks, in order to alter the competitiveness of their country's economy. As a rule, a country intervening to devalue its currency provokes greater consternation among other countries than intervention in the opposite direction. In the short and medium terms, devaluing the currency increases a country's competitiveness, but, at the same time, it increases inflationary pressures on the domestic market and undermines international trust in the currency in question.

As shown above, the following can be observed: If real interest rates are high internationally, then this is a price signal for capital scarcity. If the employment situation is good, then net capital imports are welcome from a country's perspective —and hence so too are the current account deficits that go with them. If real interest rates are low internationally, then a full-employment equilibrium is precarious. The danger of slipping into a recession or even a depression then shapes the general perception of the situation and the discussion in the media. In this case, the global economy is either in a Keynes world or not far from it.

We can again use the image of the "split personality" in comparing high and low full-employment real interest rates. If citizens are always both (potential or actual) producers and consumers, the focus is on their role of consumers when there is full employment with high real interest rates, since the risk of long-term unemployment is low. If full employment is not assured and the real rate is low, then citizens are interested, above all, in their role as producers. In this case, their thinking and action is determined especially by job concerns.

In light of the finding of the previous section, we can draw the following conclusion:

When the natural rate of interest falls, the weight of the producer in the voter's split personality rises at the expense of the weight of the consumer. The political economic situation is thus a function of the level of the natural rate of interest.

The WTO is an institution that has only limited possibilities for imposing sanctions on member states that violate its rules. Among other things, WTO proceedings are long and drawn-out. As we could see in the recent past, moreover, a member state like the USA can effectively paralyze the WTO dispute settlement apparatus. Hence, the rules of free trade can only be upheld, if the most important WTO members really want to uphold them.

But the ability to act of the governments of WTO member countries depends on there not being massive opposition among the majority of voters. Otherwise, sooner or later, the moment comes when the member in question resorts to unilateral measures that are not in accordance with the rules of free trade, but that—rightly or wrongly—are regarded as beneficial to voters' job security.

## 10.6 The New Protectionism

The election of Donald Trump and the trade policy that he has pursued as president are symptomatic of the fact that forces in the global economy have shifted in the direction of protectionism. Trump's election—which hardly anyone expected a year earlier—was not, in our view, an inexplicable "accident." It points to a change in the electorate, which is less and less impressed by the achievements of globalization and is assigning more and more weight to its costs in the form of job losses.

Modern protectionism can thus be understood as a contemporary version of anti-machinery "Luddite" movements. The fear of losing one's job that is provoked by advances in digitalization are a modern form of the fears that the invention of the spinning machine and the mechanical loom provoked in their time. Trump's 2016 election as president of the USA is thus a symptom of a natural rate of interest that is becoming increasingly negative.

There is no doubt that the USA is one of the main "winners" in the process of globalization. We have only to think of the sensational global changes coming from Silicon Valley and other American hubs of digital innovation. If there were no grateful global market for the products of the American IT industry, its profits would be far lower. The model of producing software in the USA, but the hardware in China led to the earlier incredible success of these companies on the stock exchange. As of the end of December 2020, the five most valuable companies in the world are currently American digital pioneers.

Globalized finance has also contributed to increased prosperity in the USA. The global investment market does not only create substantial income streams for financial professionals in its capital New York, but also for their American customers. Many middle-class Americans derive a considerable part of the income on their savings from the dividends of American and non-American multinational companies. A large part of the shares of the major Germany companies included in the DAX-30 index are held by American funds. The influx of foreign capital into the USA also promotes American prosperity. The return on these investments is far lower than the return on American capital invested abroad as shareholdings. By far the greater part of the foreign capital in the USA is invested in fixed-rate assets: to a large extent, in American treasury bonds. This means that American investors can borrow at far lower interest rates than they could without these capital imports. This phenomenon has, after all, been described by Bernanke as a "saving glut" (Bernanke 2005).

Nevertheless, the discussion among American voters is increasingly focused on the relocation of jobs abroad within the framework of globalized value chains. (There is a growing literature on this subject. Cf., for example, Rodrick 2018 and Komlos and Schubert 2019, which includes extensive bibliographical references.)

Trump used his executive powers to impose a protectionist line. This included employing measures that are usually not regarded as part of trade policy at all: like, for example, the sanctions against Iran. As is well known, the latter also affect German firms, which Trump has threatened to exclude from the American market unless they stop their deliveries to Iran. The protectionist line of American trade policy is now also part of President Biden's agenda. If he wants to maintain and increase voters' support in the mid-term elections, he needs to be protectionist unless, as we propose below, free trade rules are complemented by obligations of WTO members to aim at nearly zero disparity between exports and imports.

Recent US trade policy highlights a strength that the USA has always had. The USA represents the largest domestic market in the world. For many exporters, especially from Asia, it is an even more important sales market than the European Common Market. If we take, for example, the current conflict between the USA and China, the USA holds the better cards, because American imports from China are far greater than Chinese imports from the USA. (Cf. also Felbermayr 2019, as well as Fetzer and Schwarz 2019. The latter analyze the political economy of the new trade policy using simulations.)

In times in which the full-employment level of the interest rate is either in the range of the Keynes world or in the transitional zone, access to the domestic market is the strongest card that a country or a common market comprising several countries can play in trade diplomacy. This is the strength that Trump was exploiting in his international trade policy (cf. also Simon 2019). Politically, Biden cannot afford not to play this card. He may do this with greater diplomatic skill than his predecessor, but he will remain protectionist.

This strength is further increased by the USA's high current account deficit. If tariff barriers are set up everywhere, the job losses appear to be greater for voters in the USA's supplier countries than for voters in the USA itself. In other words: One can suggest to American voters that high tariff barriers that are the same level for American imports and exports amount to a "re-importing" of American jobs. (The trained specialist in macroeconomics knows that things are more complicated in the context of a general equilibrium and cannot be reduced to such a "re-import" optic.)

In an interview with the Financial Times (July 20, 2018), Henry Kissinger let it be known that: "I think Trump may be one of those figures in history who appears from time to time to mark the end of an era and to force it to give up its old pretenses" (Kissinger 2018). Kissinger may be right. In matters of trade policy, Trump may have been not so much the cause of the new protectionism as its beneficiary. American trade negotiators can be expected to continue playing the card of the USA's strength even after the end of the Trump era—under pressure from an electorate for whom jobs have become more important than low prices.

Even before Trump, the USA occasionally exerted political pressure to make exports to the USA more difficult. In East Asia, Japan depends on the US military for protection. With the growing military power of China, this dependency is becoming greater. Moreover, Japan has long relied on being able to export to the USA without major trade barriers. Thus, decades ago already, the USA "forbade" Japanese authorities from devaluing the yen, so that private Japanese savings, which exceed full-employment investment, could be diverted abroad. As consequence, Japan had to offset these excess private savings by high fiscal deficits, in order to maintain full employment with only a slight export surplus. We presume that the Japanese population would have preferred a different economic policy solution.

## 10.7 A Multilateral Balanced Account Agreement

From our finding that the natural interest rate level is already negative today and will tend to slide even further into the minuses in the future, we conclude that there will likely be no going back to the de facto rules of the pre-Trump era. If free trade is preserved and if most other currencies remain convertible into US dollars, the interest rate in dollars will no longer rise to levels corresponding to an undeniable return to the Friedman world. Under these conditions, the net inflow of large amounts of capital into the USA will ensure that real interest rates in dollars remain low. In political–economic terms, however, such a hypothetical situation is not sustainable. Due to high current account deficits, American voters will compel any congressional majority to play the card of the USA's large domestic market, just as has happened vis-à-vis Japan for decades already and as Trump has done in generalizing the earlier Japan policy.

Our proposal for modifying the international trade regime is intended to safeguard free trade in political-economic terms. We thus propose:

### A multilateral balanced account agreement

The OECD plus China region undertakes to uphold the rules of free trade. At the same time, however, each currency area in this region undertakes to bring its current account balance close to zero by using appropriate fiscal measures.

We will say something about the implementation below. For the moment, let us just note the following: If the current accounts of the currency areas are more or less balanced, then it will always be possible to respond to the advocates of protectionist measures that foreign retaliatory measures will cost about as many jobs as the original measures "gain." Protectionists in countries with current account deficits are thus deprived of a popular argument.

As we have shown, the resurgence of protectionism is tied to low real interest rates, which can be attributed, in turn, to the already negative and still falling natural rate. If, however, real interest rates are below the steady state growth rate of a country, then additional public debt does not represent any additional burden on future generations. If, furthermore, the additional debt is used to promote public and private investment, then it even increases prosperity as compared to investing the excess savings abroad at low interest rates. At low interest rates, the additional public debt for the purpose of eliminating a current account surplus is thus a better way of providing for the future, even when we leave aside the free trade that it "purchases" (cf. also Blanchard 2019).

Although risk-free real interest rates will remain low in our opinion, the proposed balanced account agreement should also be enacted if the level of the real rate is high at full employment. In this case, the countries with current account surpluses should not be required to increase their public debt. It is up rather to the countries with current account deficits to diminish the latter by slowing down the growth in their public debt.

A kind of symmetry thus comes into being. The agreement has the effect of shifting the interest rate in the direction of the economy's growth rate. At an interest rate level below the growth rate, the countries with current account surpluses increase their public debt, as a consequence of which global interest rates rise. At an interest rate level above the growth rate, the countries with current account deficits reduce their public debt, as a consequence of which global interest rates fall. These corrections based on the balanced account agreement increase overall prosperity in the OECD plus China region, because the Golden Rule of Accumulation applies (cf. Chap. 2 on capital-theoretical foundations). But they also increase prosperity in the countries that are required to undertake the corrective measures: For even apart from the balanced account agreement, when interest rates are low, it makes sense for a country to increase its public debt, in order to finance more public investment and/or reduce taxes that have distorting allocational effects. And even apart from the balanced account agreement, when interest rates are high, it makes sense for a country to roll back public debt, in order not to have a heavy debt service burden in the future.

### References

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## 11 Europe, the Euro and German Demographic Renewal

### Abstract

Access to the domestic market is nowadays the trump card of trade diplomacy. The larger the domestic market, the more effective it is. The euro is thus the decisive pillar of the European single market. The German debt brake is incompatible with the long-term stability of the euro. For as long as it applies, full employment can never be achieved in the eurozone as a whole. Under current fiscal policy, full employment would require unrealistically high export surpluses. A euro doomed to underemployment will collapse. Hence, the international fiscal order must also be applied among the nation states in the euro area. Germany's resulting obligations offer an opportunity for a German demographic renewal by aggressively encouraging the immigration of skilled workers.

## 11.1 The Single Market

When the process of European unification began after the Second World War with the European Coal and Steel Union and then the European Economic Community, the goal of these steps was to ensure peace in Europe. At the same time, economic recovery was closely linked to the East–West conflict and, in particular, the Cold War between the two world powers, the USA and the Soviet Union. For a long time, members of the common or "single" market were only countries that were also close allies of the USA by way of membership in NATO. It was only starting in the 1990s, after the fall of the Berlin Wall and the dissolution of the Soviet Union, that countries that were not part of NATO also joined the single market: in particular, Austria, Sweden and Finland. The political and military climate had changed. Apart from economic criteria, a "community of values" was now decisive for membership in the European Union—not participation in a military alliance anymore. But membership in a common market also requires that certain basic preconditions of a market-based economic order are fulfilled.

Among citizens, however, there is still no consensus today on which matters should be subject to a common and uniform approach in the EU. The Brexit vote in the summer of 2016 showed that certain EU regulations are so unpopular that a majority of voters may support their country withdrawing from the common market. Many people are of the opinion that the decisions taken in Brussels, Strasbourg and Luxembourg reflect a lack of understanding of the principle of subsidiarity.

If we compare the history of the process of European unification up to now and the formation and consolidation of the USA, we find that, in addition to the much greater linguistic diversity in Europe, there is also an important difference in the constitution of the two federal structures. In Europe, member states have the right to withdraw from the union. The individual states comprising the USA do not have such a right. Twice in the nineteenth century, under Jackson and later under Lincoln, the USA fought civil wars triggered by member states' wanting to secede. Twice, a federal army under the command of the president of the USA had to defeat a separatist army to avert secession. The right to withdraw from the European Union is, of course, closely connected to the fact that it would be unthinkable in the twenty-first century to prevent the secession of a member state by military means.

What are the conditions for the persistence of a union of states in which each member state has the right to secede? We want to examine this question from the point of view of economic policy in particular, using ideas that we have developed in the prior chapters of this book.

### 11.2 Europe's Global Political Environment: International Demand Power

Picking up on our analysis of free trade in the last chapter, we want here to point to the enormous dynamism of the global economy and of global society. It is not only the Chinese economic miracle that has marked world politics in recent decades. As Hans Rosling and his co-authors have convincingly demonstrated in their book Factfulness, many observers from rich countries have blinders on that prevent them from being sufficiently aware of the great progress that has been made in the developing countries and especially in the so-called emerging economies (cf. Rosling et al. 2018). We have already touched upon the rapidly increasing average life expectancy of the global population in Chap. 3 (on desired wealth). According to the 2017 UN population forecast, based on the trend in birth rates, the global population can be expected to peak in about 100 years and to decline again from then on (United Nations 2017). It is fairly certain that some of the countries that are still considered today as "emerging economies"—such as India, Brazil, Indonesia, Iran and others—will join the club of rich countries in the course of the twenty-first century. In the last 12–15 years, for instance, per capita real income in India has doubled. At the same time, the Indian birth rate has fallen sharply.

We can thus assume that the relative importance of Europe in the global economy will decrease. The share of European GDP in global GDP will continue to fall. The rest of the world will become less and less dependent on European high-tech products. Whatever European technology can do, the technology of China, Japan, South Korea, Israel, Singapore, India or Brazil can increasingly do as well. The USA has long been Europe's equal in technical terms, even if there are differences from one sector to another, sometimes in favor of the USA, sometimes in favor of Europe.

No matter the form of government, public authorities are always interested in offering citizens as many employment opportunities as possible. Economic growth has thus to keep pace with population growth and increased labor productivity. As discussed in the last chapter, in light of the proximity of the Keynes world, the size of the domestic market is the most important card that any country can play in international trade diplomacy.

A world of potential international demand power is increasingly coming into being. The concept of demand-side market power comes from competition policy and antitrust law. It refers to the phenomenon of large retailers being able to obtain more favorable purchasing conditions in negotiations with manufacturers than smaller buyers are able to obtain. This has led, for example, to a strong process of concentration in the retail food sector. (Cf. various opinions of Germany's Monopoly Commission on the food retail trade, as well as Chap. V of its 2012 main report [Monopolkommission 2012].) If free trade cannot be relied upon as the institutional regime of the global economy, then it is also advisable for a continent like Europe to adapt to the phenomenon of international demand power.

Concretely, this means that—other things being equal—larger states or larger currency areas can expect to enjoy better conditions in international trade than smaller states or smaller currency areas. Of course, certain smaller countries—like, for instance, Switzerland or Israel or Singapore—can achieve or obtain advantages through superior flexibility, which may compensate for their lack of size. But here it is always a matter of specific, historically evolved advantages that are not available to every small state.

Today, better conditions of international trade mean, in particular, better export opportunities to other countries or currency areas.

We have already mentioned a striking example of international market power in the previous chapter: the effective threat by the US administration to prohibit German firms from exporting to the USA, if they violate US sanctions against Iran. Germany's exports to Iran are "peanuts" in comparison to German exports to the USA and already existing German direct investment in the USA.

## 11.3 The Euro and the Single Market

In the debate that preceded the introduction of the euro, the proponents of a common currency saw it as a vehicle for accelerating the process of integration. The opponents argued that the member states were not yet ready for a common currency, given entirely different national "economic styles" (Müller-Armack; cf. Dietzfelbinger 1998). The time since its introduction has not led to a clear victory of the one side or the other. Friedman's (1997) prophecy that the euro would fail has not come true, but neither has it brought about the progress in European integration for which its proponents had hoped. The global economy has, however, adjusted to the fact that the euro will remain the currency of a large economic area.

The soaring value of the euro against the dollar before the 2007–2008 financial crisis is a thing of the past. The Greek crisis and the fragility of the southern euro countries forced the European Central Bank to adopt a policy of maintaining the lowest possible interest rates. Simultaneously, confidence in the stability of the eurozone waned on the international capital markets. As a result, the exchange rate of the euro against the dollar was significantly lower than it had been. This did not only help the competitiveness of the southern euro countries, but also the competitiveness of the considerably stronger northern euro countries. It is in no small measure thanks to this "weak" euro that Germany, before COVID-19, enjoyed its high export surpluses and thus too full employment and "healthy" public finances.

It should not be forgotten, however, that the resolutely expansionary fiscal policy pursued by the USA under President Obama made a major contribution to the overcoming of the 2007–2009 global financial crisis. Helped also by an expansionary monetary policy on the part of the Federal Reserve, the USA again became the engine of the global economy, which stabilized global demand for goods and services by running a substantial current account deficit.

The following analysis of the euro and its problems builds on previous analyses by various economists. Three books, in particular, should be mentioned here: Brunnermeier et al. (2016), Sinn (2014) and Stiglitz (2016).

Today, the euro area has an export surplus, which is important for the fact that the employment situation has improved and that, with the exception of Greece, no deflationary crisis has arisen in the southern euro countries. But the employment situation remains unsatisfactory in the southern euro countries. Many observers in Germany and other northern euro countries put the blame for this still unsatisfactory situation on the domestic policies of the southern countries, which, in their view, have not had the courage to undertake deregulatory measures. Both critics and supporters of current eurozone economic policy agree that the relative prices between the different eurozone countries are distorted. There is disagreement on whether correcting them should occur by way of further deflation in southern Europe or higher inflation in the northern part of the euro area. We do not want, however, to provide extensive analysis of this topical issue here.

There is also the idea of splitting the eurozone into a northern eurozone with a strong euro-1 and a southern eurozone with a weak euro-2. From the point of view of the southern countries, there is something to be said for this. For today's relatively "weak" euro is still stronger than a euro-2 only comprising the southern countries would be. The current euro may be gratifyingly weak for German industry; nevertheless, it is precisely because of German industry that it is stronger than the southern euro countries could possibly want it at the moment.

The arguments of some commentators in favor of a strong northern euro or euro-1 are not very convincing. This euro-1 would have a significantly higher exchange rate against the dollar than the present euro. It would thus exert deflationary pressure on the northern euro countries, leading to an economic slowdown. With given fiscal policy, the latter would probably have to resort to intervening on the foreign exchange market, like Switzerland does, in order to prevent the euro-1 from having too high a dollar value. This is possible for the Swiss National Bank: Even a Trump administration had little against a deliberate weakening of the Swiss franc, since this is primarily achieved by the Swiss National Bank purchasing euros and thus strengthening the euro. But the weakening of the euro-1 by its central bank would have to be achieved by massively buying up dollars. This would, in turn, bring into action any US administration, which would attack such behavior as a violation of the rules of the system of free trade. In the interest of preserving free trade and also for the benefit precisely of the people in the euro-1 area, a northern euro or euro-1 would have to refrain from massive manipulations of the exchange rate against the dollar. In order not to be pushed into a recession or even depression and a deflationary trap by a high euro-1 exchange rate, the member states might have to make extensive use of fiscal policy to boost demand. At the same time, the monetary policy of the euro-1 central bank would have to be aimed at maintaining the lowest possible interest rates. Debt brakes on the German model would thus be incompatible with membership in the northern euro area.

These observations on a hypothetical northern euro are based, of course, on our analysis that the OECD plus China region is in a Keynes world, or at least in the transitional zone between a Keynes world and a Friedman world, and can be expected to remain so for a long time. The details can be found in the previous chapter (Chap. 10) on the struggle between free trade and protectionism.

A "strong" northern euro is thus not even advisable for the potential members of the northern euro area themselves. Nonetheless, the thought experiment involved in imagining this sort of northern euro is of interest, because it makes clear the other side of this coin: namely, that the potential northern euro countries benefit from the fact that the euro is so weak due to the membership of the economically weaker southern euro states. As long as international economic policy tolerates this state of affairs, Germany can afford its debt brake, precisely because it uses the same currency as countries that are far removed from any debt brake.

In Germany, the current situation is often depicted as follows: Germany, with its high export surpluses, is the economic engine of the eurozone, inasmuch as these export surpluses and the resulting high employment in Germany also lead to higher German demand for goods from France, Italy, Spain, Portugal and Greece. This observation is correct to the extent that it holds other things being equal, i.e., at a given exchange rate of the euro against the dollar as reference currency and against other currencies. But it is misleading to the extent that Germany is in such a good position on the global market precisely because it is part of a monetary union with the countries whose economic engine it allegedly represents. For then it becomes clear that France, Italy, etc., suffer precisely from the fact that the euro area also includes Germany and the other more competitive member states. The euro is "too strong" for France, Italy, etc. and forces these countries into deflation. Once we see this connection between the euro exchange rate and German current account surpluses, nothing is left of the idea that Germany is the economic engine of the eurozone.

## 11.4 The Euro as Pillar of the Single Market

If our analysis in the previous chapter is correct, viz. to the effect that it is strategically advantageous for a region to be part of a large internal market, then Europe's single market represents an advantage for the people of Europe that goes beyond the advantages that are usually mentioned in international trade theory. What is at issue then is that an individual European nation like Italy, for example, not become the target of trade policy manipulations on the part of other big "markets" like the USA, China and India. The single market means precisely that trade policy issues are decided upon by its members collectively, thus preventing an imbalance in the strength of the negotiating positions of one of the global giants and any individual European country. The coordination of trade policy within Europe is thus important for ensuring that the community of values of the European nations can be sustained.

The problems arising for Great Britain after Brexit are also connected to the fact that it is far more interesting for any of the world's countries to have access to the European single market than to the British market. The European Union can certainly adopt a friendly "good neighbor" policy toward Great Britain—and thus reduce the separation pains that the latter will experience. And we have to hope that the remaining 27 EU members are wise enough to adopt such a policy toward the renegade ex-member. It is by no means certain that they will, however—especially since not all 27 member states are in as good a position economically as Germany, for example. But, in any case, the backing that Great Britain enjoys in negotiations with non-European powers has been diminished by Brexit.

The current problems with Italy show that further withdrawals from the single market cannot be ruled out, even if such secession is not beneficial for the country in question. The stabilization of the single market is not automatic. It also cannot be ruled out that member states will formally remain in the European Union, but, nonetheless, adopt national measures that undermine the internal market rules. The problems that the European Union is currently having in terms of the rule of law with member states like Poland, Hungary or Romania demonstrate the extent of the potential centrifugal forces that the European Union has to resist.

A stable euro is an important, perhaps indeed decisive, pillar for holding the European Union together. Stable in two senses: firstly, as regards its purchasing power. In Chap. 9 on monetary stability and the stability of the open society, we discussed the relationship between a stable value of the currency and the stability of a free, democratic social order. But the stability of the euro also entails that citizens can rely on its continued existence.

If the euro were to fail and national currencies were to take its place again, this would be a sign of weakness for the European single market. Whatever the reason for the collapse of the common currency, in the new era of international economic policy, it will be seen by big non-European countries (the USA, China, India, Russia and Brazil, for example) as a signal that the European countries can be played off against each other: That the big countries can now bring the demand power created by their size to bear against the much smaller European countries, because the common defense of interests no longer seems to work in Europe. This can give rise to a diplomatic and political dynamic that then actually does lead to the de facto collapse of the rules of a common market.

Thus, for example, each of the individual national currencies could be linked to different potential candidates for the role of the future global reference currency. China's global "New Silk Road" strategy could thus be supplemented by a currency component. If, for example, the neo-D-mark is pegged to the yuan to counter the US accusation of currency manipulation for the purpose of devaluation, whereas the more inflation-prone national currencies like the neo-lira are pegged to the dollar, then, as a matter of course, Europe's national markets will also begin to grow apart.

Among other things, a common currency like the euro also serves to ensure that in the Keynes world, the lack of a Nash equilibrium for intra-European free trade cannot lead to new national protectionist strategies using exchange rate policy. For there is no national exchange rate policy to be abused anymore. The common currency thus directs the focus of national policy toward the rules that have to be followed if a country wants to remain part of the monetary union. One cannot draw the bow of discipling national policy via the common currency too tautly, however —otherwise it breaks. We will turn now to this last point in greater detail.

### 11.5 The Problem of National Current Account Balances

Germany exhibits a high export surplus and hence also a high current account surplus. And this is not only sporadically the case, but is practically a "structural" feature. To this export surplus, there also corresponds a substantial excess of aggregate savings as compared to aggregate investment. Ante COVID-19, households, the corporate sector and the state were are all running surpluses in Germany. This is unusual for the OECD countries. In most of them, both the corporate sector and the state run structural deficits.

If each member state of the European Union had its own national currency, we would be able directly to apply the considerations that we presented in the chapter on free trade in the new era of international economic policy. The essence of our proposal was that in a Keynes world with low real interest rates, countries with current account surpluses should eliminate them by increasing their fiscal deficit. Germany would accordingly have to abandon its debt brake to fulfill its obligations under the balanced account agreement that we have proposed. In perfectly symmetrical fashion, in a Friedman world, countries with current account deficits would be obligated to reduce their fiscal deficit to contribute to lowering real interest rates. At present, however, we are clearly in the Keynes world of low real interest rates.

But this balanced account agreement remains attractive even if a group of countries has a common currency. This is the case for the euro. Thus, the balanced account agreement between the different currency areas should also apply for the euro area. Trump had accused Germany of engaging in a form of covert currency manipulation at the expense of American jobs by virtue of its membership in a monetary union with far weaker partners. If, in the Keynes world of the new era of international economic policy, the national priority is the creation or preservation of as many jobs as possible and no longer facilitating the most inexpensive possible imports, then the accusation is not entirely off-base. We do not share this view as far as German intentions are concerned. But the result is the same as it would be if Germany had deliberately joined a monetary union with weaker partners, in order to benefit from a weak currency for the purpose of creating jobs.

The anger of the other eurozone countries that Germany incurs as a result of its current account surpluses is a serious problem for the cohesion of the European Union and the political stability of the euro. We already showed above that the notion that Germany is the economic engine of the eurozone thanks to its immense export surpluses is misleading. The resultant strengthening of the euro against other world currencies, and, in particular, against the dollar, makes it more difficult for the weaker euro countries to achieve full employment. It is already the case today, when there is insufficient employment in the southern euro countries, that the euro area runs current account surpluses. With given fiscal policy and with full employment in the euro area as a whole, the current account surplus of the euro countries as a percentage of gross domestic product would be comparable to the surplus that Germany runs now. But, if dollar interest rates are no longer rising significantly, the exchange rate of the euro would then be far higher than it is today. But this means that such eurozone current account surpluses cannot occur.

In other words, if Germany and the other comparable northern euro countries retain their present fiscal policies, then the southern euro countries cannot reach the goal of high employment. If they tried to do so by way of additional public debt, the capital market would punish them with high risk premiums. It would not even be necessary for the European Commission to take any disciplinary action.

This would be a potentially explosive situation for the euro. At best, an extremely expansionary US fiscal policy with consequent high dollar interest rates could bring about a transition onto the terrain of the Friedman world. In political-economic terms, it is, however, likelier that under any USA presidency non-market interventions will take place in the USA of a sort that will take the world even further away from the virtues of free markets and free trade. As an example, we need only think of the price controls that were decreed by President Nixon at the height of the Vietnam crisis.

If there is no such extremely expansionary US fiscal policy, the impossibility of achieving full employment in the euro area with current northern European fiscal policy may deprive the euro of its integrative function. A revolt of the southern euro countries, such as has already been foreshadowed in various elections and protest movements, will then indeed lead to a partition of the euro zone, if not to an outright return to national currencies.

## 11.6 Investment Promotion as the Solution?

One often hears that governments should do more to encourage investment. The hope is that a higher rate of investment will lead to higher growth and a more dynamic economy. And it is also hoped that the gap between private saving and private investment will be reduced. Overregulation is frequently identified as an important obstacle to investment.

It is not our intention to examine the issue of investment conditions in detail in this book. We believe that our analysis of the private savings surplus is valid, regardless of whether the thesis that governments can and should create more favorable investment conditions is right or wrong. In dealing with the subject of excess saving, it is important to think not only in flow variables like "saving" and "investment," but also in stock variables like "desired wealth" and "real capital stock." Time variables are also helpful. Look at the ratio between "desired wealth" and "consumption per year" (the variable Z from Chaps. 2 and 3 on the natural rate of interest and on desired wealth). Then compare it with the ratio between "real capital" and "consumption per year" (the variable T, i.e., the period of production, from Chaps. 2 and 4 on the natural rate of interest and on real capital).

There is no doubt that a government policy that promotes current investment can lead to an increase in the share of gross investment in gross domestic product. If, however, we ask whether such measures also increase the capital tied up in the production process relative to current consumption, we cannot avoid considering the specific nature of the investment promotion. The latter should, after all, be economically productive: We do not want, to use the Keynes example, to promote the construction of economically unproductive "pyramids," but rather the construction of such plant and equipment as increases productive capacities. Ultimately, investment promotion is supposed to help to raise peoples' standard of living. This observation is practically identical to the following one: Ultimately, promotion of private investment is supposed to improve consumption possibilities. But this alone does not tell us whether public promotion of investment increases or decreases the ratio between the capital tied up in the private system of production and total consumption.

A more precise analysis reveals the following: At a real interest rate r that is a correct intertemporal price signal, investment promotion that does nothing other than increase the capital intensity of the production process with the same technology only makes sense if this interest rate is greater than the steady state growth rate g. This is the Golden Rule of Accumulation, which we derived in generalized form in Chap. 2. If we are in the Keynes world, however, then r < g holds (cf. also Blanchard 2019). Hence, for the Keynes world, public promotion of a pure increase in capital intensity with the same technology is out of the question, because it leads to sustained lower consumption.

Investment promotion whose purpose is to change technology is a particular form of promoting economic growth. Whether—other things being equal—this form of promoting technical progress is likely to increase the capital tied up in the private production process has to be studied more closely. If we think of the buzzword of digitalization, which is so popular nowadays, skepticism is in order. When Germany's governing coalition launches a program for promoting artificial intelligence, it has, above all, the competitiveness of German industry in the global economy in mind. The point is to create jobs in Germany and to protect existing jobs by giving employees additional training. But whether this German promotion of growth increases or decreases the capital tied up in the global production process cannot be determined a priori from the fact that it ensures that there are more jobs in Germany. It could be that jobs are thus created in Germany, but using machines that eliminate existing jobs in the global economy or at least reduce the average roundaboutness of production in the global economy.

In the theoretical literature, there is a simple model that gives an answer to the question posed here on the amount of capital tied up in production (Solow et al. 1966). In this model, technical progress is "embodied." Each individual technical advance is only introduced into the production process by building equipment (machines) that translates this advance into practice. When, for example, a particular step in the production process gets automated, the old equipment is scrapped and replaced by new equipment.

In this model, we can now ask how the ratio of the capital tied up in production to current consumption changes, if, at a given steady-state real interest rate, the rate of technical progress is increased. Solow et al. (1966) model is analyzed in Weizsäcker (2021, Chap. 5, Sect. 1), where there is a clear answer to this question: At a given real interest rate, the relative amount of capital tied up in the production process (i.e., this capital divided by current consumption) is less, the greater the rate of technical progress.

To the extent that this outcome of the model is representative for the real world, we arrive at the following conclusion: In a Keynes world—namely, in a world with low real interest rates—an economically sensible form of investment promotion does nothing to increase the ratio between capital tied up in production and current consumption. The opposite is rather the case.

The intuition corresponding to this outcome is as follows: The greater the rate of technical progress, the faster the real capital stock "turns over" or, in other words, the faster it is renewed. A greater rate of technical progress leads to the share of gross investment in gross domestic product also being greater. But the machines lose value faster. Their useful life is shorter, if technical progress is greater. But a shorter lifespan of plant and equipment leads to less capital being tied up in relation to the output produced annually by this capital together with the other factors of production, labor and land. Every economist knows that the capital tied up in the provision of housing as compared to annual value output is much greater than the capital tied up in the production of industrial goods. And every informed observer of economic life is aware that the lifespan of residential buildings is far longer than the economically useful life of production facilities in manufacturing. The economically useful life of fixed assets is the most important variable for determining the relative amount of capital tied up in production processes. Faster technical progress reduces the economically useful life of plant and equipment.

As already noted at the outset of our book, we can sum up our main thesis in the following sentence: The lifespan of people is rising, the lifespan of machines is falling.

Public promotion of private investment may or may not make sense for other reasons, depending on the specific situation. But it contributes nothing to solving the problem of excess private savings.

Of course, a deviation from the steady state can generate a temporary fireworks display of publicly induced increased private investment and thus boost the economy. Inasmuch as the problem is not the structural excess of private savings, but a temporary deficiency in the "animal spirits" of potential investors, a classical Keynesian strategy of encouraging investment through tax breaks or public subsidies may well be helpful. In this sort of situation, these stimulus measures also increase the value of existing plant and equipment, which are thus more fully utilized. The side effect of investment promotion on the value to existing plant and equipment is in this case the opposite of the effect when growth is promoted by encouraging technical progress.

### 11.7 A European Balanced Account Agreement, but "No Bailouts"

German authorities made the bitter pill of separation from the D-mark sweeter for German voters by promising them a euro that is subject to monetary rules under which German taxpayers would never have to pay for the public debt of other member states no matter what. This promise was not kept: Greece was supposedly "too big to fail."

But the Greek crisis also fits the general empirical finding that the insolvency of a state is always accompanied by a current account deficit of the country in question. No one fears Japanese fiscal insolvency, even though, relative to domestic product, Japan's debt is greater than that of Greece was at the start of its crisis.

This finding can be used to argue for the following arrangement for the eurozone countries:

The balanced account agreement that we proposed in the last chapter should not only be applied to the current account of the euro area as a whole, but also to the current accounts of the individual members of the eurozone. In addition, however, the no-bailout principle should be reaffirmed: Every member state is responsible for its own solvency. No country may expect other eurozone countries to relieve it of the burden of its public debt.

A balanced account agreement on the level of the individual euro area countries is necessary, if only because otherwise the euro area as a whole will not be able to fulfill its obligations under the worldwide balanced account agreement. This especially applies for the part of the balanced account agreement relating to the Keynes world, in which interest rates on the global capital market are low. Due to European demographics, the euro area tends to have a particularly high private savings surplus. If the eurozone or the European Union assumes the obligation to maintain a balanced current account, then, in light of decentralized responsibility for fiscal policy, it can only meet this obligation if the member states, in turn, assume analogous obligations. This means that if we are in a Keynes world, the countries with current account surpluses must quickly increase their fiscal deficits. This is all the more urgent inasmuch as the weaker eurozone members are on their own as far as the security of their public debt is concerned. They have, therefore, to pursue a very cautious fiscal policy; and hence, they cannot make any contribution to reducing the current account surplus of the euro area by undertaking a more expansionary fiscal policy.

The instruments to be used in implementing this sort of intra-European balanced account agreement will not be discussed in detail here. But we will touch upon a few points regarding the German case in the next section.

## 11.8 The Result for Germany: Demographic Renewal

The upshot of our analysis is this: We can expect to be in a Keynes world for a long time, since the tendency of the natural rate of interest is to become increasingly negative. Hence, there must also be an intra-European balanced account agreement. The fiscal policies of the eurozone member states have to be put at the service of such a balanced account agreement. Within the eurozone, complete national autonomy in fiscal policy is no longer compatible with the integrative function of the euro in maintaining a truly functional common market in Europe. And in the new era of international economic policy, Europe needs the latter. Political economy thus teaches us that the German debt brake is incompatible with upholding the commercial interests of the European and hence also the German population.

A German fiscal strategy compatible with the proposed balanced account agreement could consist of increasing public investment far beyond the level presently envisaged in medium-term fiscal planning. Publicly financed infrastructure is normally complementary to private real capital. Better transport routes, a better supply of well-educated, highly skilled workers, and better publicly funded research institutions all increase the profitability of private real capital.

Hence, at low interest rates and with a current account surplus, an increase in public deficits does not crowd out private investment, so long as this increase serves to finance public investment.

Such a program of deficit-financed increased public investment also serves to promote the immigration of skilled workers from abroad and especially the faster integration of refugees into the labor market and into German society. It thus also represents a contribution to improving the age distribution of the population living in Germany.

As concerns this last point, let us recall what a contrast there is between the UN world population forecasts and the Federal Statistical Office's projections of how Germany's population will evolve. Figures 11.1 and 11.2 show this contrast.

Since the completion of the 13th Coordinated Population Projection in 2015, there has been a major influx of refugees into Germany. Hence, in 2017, the Federal Statistical Office supplemented variant 2 of the population forecast by a variant 2A. Variant 2A temporarily increases net immigration relative to variant 2 and then, like in variant 2, anticipates net immigration of 200,000 persons per year starting in

Fig. 11.1 UN world population prospects. Source United Nations (2017)

Fig. 11.2 Population development in Germany, 1950–2060. Source Authors' presentation based on data from Federal Statistical Office Germany (Statistisches Bundesamt 2015)

2021. Moreover, the birth rate has been raised from 1.4 to 1.5 children per woman. This results in a population of 76.5 million people in 2060.

Based on the Federal Statistical Office's Coordinated Population Projection, we can see by comparing variant 1 (net immigration of 100,000 people per year) and variant 2 (net immigration of 200,000 people per year) that a difference of 100,000 people per year in net immigration leads to a difference of around five million people in the population in 2060. Hence, assuming variant 2A, we can calculate that net immigration of approximately 350,000 people per year would be sufficient to stabilize Germany's population in the long term.

We advocate using the outlined setup of a global balanced account agreement, in order to manage Germany's obligations under the agreement so that they give rise to German demographic renewal. Here, some further remarks on this.

It is absurd that in a world where there is still high population growth, the population of one of the best governed countries in the world, viz. Germany, should fall. We believe that this absurdity will not become reality. Either Germany will continue to prosper: In this case, the pressure of immigration and the pull for immigration (the latter because of the great need for skilled workers) will be so strong that the population in Germany will not decline. Or: Germany will do so poorly that young skilled workers will emigrate, thus making it no longer possible to finance the welfare state, thus accelerating the loss of population, and thus making conditions even worse—so that, in the end, it is no longer possible to say that Germany is one of the best governed countries in the world.

Hence, demographic renewal should be strived for in any case. If public investment is tailored to this goal, the resulting boost in domestic demand would lead anyway to a fall in Germany's current account surpluses. German demographic renewal would thus represent an important contribution to realizing a global balanced account agreement.

## 11.9 A "Just" Distribution of Employment Opportunities

A program for German demographic renewal like the one that we have proposed here can also be understood as the better way of developing German prosperity. Thanks to the elimination of current account surpluses that goes with it, it also helps the other eurozone countries. It thus serves to stabilize the euro and the European single market. In the context of the new era of international economic policy, these favorable effects of such a policy for other countries are also good for Germany. It is thus not a policy that is implemented at the expense of some other group, whether domestically or abroad. The benefit that other countries derive from the German policy shift does not conflict with the benefit that Germany itself derives from the policy. It is a "win-win" situation.

But, in addition, it is worth pointing out that the return on Germany's net exports of savings leaves much to be desired. By far the greater part of German capital exports are invested in loans with "fixed" interest rates. We put the modifier in quotation marks, because such investments have already proven to be the source of major losses on several occasions. We need only think of the German regional banks [Landesbanken] that failed due to misguided investments abroad, thus costing taxpayers a great deal of money. The returns achieved on nominally fixed-rate foreign investments are minimal in today's Keynes world. On our assessment, the overall economic benefit of the public investment proposed here is far greater. If this investment is viewed as part of the process of demographic renewal that we have called for, then the gain in prosperity can be seen not only in a given population enjoying better public infrastructure, but also in the fact that the influx of industrious immigrants that it triggers serves to improve the age distribution of the population, reducing the relative share of retirees. People already living in Germany today and their descendants benefit from the arrival of the newcomers thanks to the better age structure.

Instead of the "décadence" of a shrinking population on German soil, Germany will become a country of new beginnings: a magnet for young, industrious people from all over the world. The USA, the traditional global magnet for immigration with its entrepreneurial dynamism, can serve as model, if it is combined with the specifically European irenicism of the German welfare state: a welfare state that is big enough to fulfill its specific functions, but not so sprawling as to interfere with economic incentives—a welfare state that provides support, but also makes demands.

Moreover, we should not forget the implicit public debt that arises under current fiscal policy due to the "wobbliness" of the euro. The Damocles sword of a possible Italian insolvency and withdrawal of Italy from the euro has to be kept in mind. If such a scenario appears imminent, there is a danger that Germany, at the head of the strong euro states, would provide financial assistance to avert Italy's insolvency, keep it in the euro, and thus avoid greater damage. The implicit "quasi-guarantee" that Germany provides for Italian public debt is obviously not written down anywhere. But no private guarantor of such liabilities would undertake this sort of guarantee without requiring the borrower to pay a substantial fee every year. As Milton Friedman said, "There is no such thing as a free lunch." The advantages that German exporters derive from the weakness of the euro come with an implicit price: The capital market assumes that Germany is providing an implicit guarantee of the sort discussed, precisely because it is aware of the advantages of euro weakness for German prosperity. The turbulence that disappointing this expectation would provoke on the capital market would already be reason enough for German authorities to take the path of least resistance and "pay up."

In other words, the German guarantee of the euro with its current membership can only be implicit and not explicit, so that the capital market has to live with the risk that someday Germany might not "pay up" after all. For this is the only way that the euro remains in its currently weak state that offers German exporters this competitive advantage.

The implicit debt that we have discussed here can be massively reduced, if Germany submits to a balanced account agreement of the sort that we have described—and attaches a declaration to it to the effect that, after massively reducing its current account surplus, it no longer considers itself obliged to prop up financially another eurozone country that is starting to founder under its public debt burden.

The basic idea of the balanced account agreement can also be expressed as follows. Nation states still retain the monopoly on the use of violence. Hence, only nation states can bring about a negative net wealth of their respective public sectors, so that citizens can enjoy net wealth greater than their real assets. Due to the negative natural rate of interest, it makes sense for nation states to make ample use of this possibility deriving from their monopoly on the use of violence. At an interest rate level below the growth rate of the economy, the collective public debt ratio D can be maintained without burdening the future. (Cf. also the AEA Presidential Lecture by Olivier Blanchard of 4 January 2019: Blanchard 2019.) If raising a national public debt ratio D when interest rates are low does not harm one's own country, does not burden future generations, and in fact benefits other countries, then ideas of global justice will also change. It will then be regarded as just for countries that can afford higher public debt without affecting their credit rating to make use of this possibility, so that countries that have a problematic credit rating can improve it by reducing their public debt with the collective public debt ratio D remaining constant.

Germany should not pay off Italy's public debt, but it is in Germany's own interest to increase its own debt, because, among other reasons, it will then be easier for Italy itself to reduce its level of indebtedness.

## References

Sinn, Hans-Werner. 2014. The Euro Trap. Oxford: Oxford University Press.

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## 12 The Global Economy After the End of Capital Scarcity: A Utopian Proposal

### Abstract

Extrapolating from List (Das nationale System der politischen Ökonomie. Cotta, Stuttgart, 1841), we explain the paradox of China: A poor country can experience tumultuous growth precisely by exporting more capital on balance than it imports. More growth can be created in developing countries by their running current account surpluses vis-à-vis the OECD plus China region. Public debt in the OECD plus China region would have then to be managed in such a way that full employment is preserved despite the current account deficit. Such a strategy would be beneficial for both groups of countries. For the time being, this is a utopian proposal. Realizing it would mean yet another restructuring, in addition to that associated with digitalization. The opposition of those who could lose their jobs as a result will ensure that this sort of reorientation of global trade policy will remain politically unfeasible for a long time still.

## 12.1 From Fairy Tale to Political Economy in Ten Years

Written in 1836:

They tell a tale in old Cologne of little elves in days long gone, when weary workers, should they please, could laze about and take their ease. And then by night – oh, what a sight! The little elves came chattering, hustling, bustling, clattering.

They rubbed and they scrubbed, they swept, washed and scurried, they cleaned and they hurried to finish the work, and before you knew it, whatever there was to be done, they'd do it!

First stanza of The Elves of Cologne. Poem by August Kopisch (translation by Anthea Bell)

Written in 1841:

Friedrich List's book The National System of Political Economy.

### Written in 1846:

For as soon as the distribution of labour comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a herdsman, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic. Karl Marx and Friedrich Engels, The German Ideology.

It was in 1836 that the German poet August Kopisch (1998 [1836]) composed his lyrical apotheosis of the magical elves of Cologne from olden days. A mere ten years later, Karl Marx and Friedrich Engels penned their famous passage expressing similar sentiments, but now in the guise of political economy and a vision of the future. Friedrich List's work on the economic present, The National System of Political Economy, came into being exactly halfway along this path from the past into the future. In it, the author placed Germany, as well as other countries like France and the USA, on the middle level of three levels of economic development. According to List, Great Britain, the most advanced economy of the time, was on the third and highest level of development. On his account, other more backward countries, like Russia, for example, were on the first level.

For List, the free trade program advocated by the British classical school was suitable for the lowest and highest levels, but not for the second level in between them. In a way, List's levels correspond to the division into "developing countries," "emerging economies," and "rich countries" that is customary today. In 1841, politically fragmented Germany and the USA were what we now call "emerging economies." For the emerging economies of his time, List recommended placing protective tariffs on goods produced by the manufacturing industry of the third stage countries.

List justifies this different treatment of the different levels by his theory of what he called the "productive powers" of a national economy. These productive powers of agricultural production or manufacturing are influenced by the institutional conditions of each country. Now, List sees a crucial difference between the productive powers of agriculture and those of manufacturing. An important part of the idea of "productive powers" was later taken over by mainstream neoclassical theory in the concept of positive externalities. In List's view, these positive externalities are, above all, to be observed in manufacturing and less so in agriculture.

Among other things, the development of the "productive powers" in an emerging economy also involves learning from the rich countries: at the time, then, learning from Great Britain. In the case of Germany industry, part of this learning from British industry later took place by way of activities that could be classified as "industrial espionage."

According to List, without import barriers, it is hard for the nascent manufacturing sector of an industrializing country to compete with the mature manufacturing sector of a rich country. As a result, the economic potential of positive externalities in the industrializing country does not get developed or at least not sufficiently developed. By using import tariffs to make manufactured goods from the rich countries more expensive, an industrializing country can make it easier for domestic manufacturing to develop and thus take advantage of the positive externalities and economies of scale of the manufacturing sector.

Following List, mainstream economics refers to this as the process of a country's "industrial education." The argument for "educational" tariffs of this sort is recognized in trade theory—under the name of the "infant industry argument." Defenders of free trade warn against putting too much weight on them, however. They rightly point out that import tariffs can also be misused to protect inefficient domestic production from international competition—and to do so precisely at the expense of overall economic development and the restructuring that goes with it. The ossification of existing structures as a result of import tariffs has to be weighed against their function as stimulant for emerging industries with positive externalities.

Historical experience with such a policy of protective tariffs is mixed. There is reason to think that it ultimately harmed development in Latin America, but benefited development in East Asia. Apart from one exception, it is not our intention to discuss these different experiences here. We want rather to continue to tease out the connections between trade policy and our thesis of the negative natural rate of interest. With this goal in mind, we make use of the—chronological—embedding of Friedrich List's theory among the backward- and forward-looking utopias of a world without the toil and drudgery of production. By way of our theory of the negative natural rate, we want to transform this embedding from a purely chronological embedding into a causal one. We are aware that, in political–economic terms, we will thus be moving on utopian terrain.

However, this sort of thought experiment—this sort of experiment in utopian thinking—can also help us to understand the phenomenon of the negative natural rate somewhat better.

### 12.2 The End of Capital Scarcity is Not the End of Time Scarcity

Many people moan about the lack of time, and they also moan about the lack of interest income. At first sight, this seems paradoxical: As we have shown, low interest rates are, after all, a consequence of the fact that we live in an age in which capital—from the perspective of the global economy—is no longer scarce. But if in the Böhm-Bawerkian approach that we have adopted here, capital is basically time, then how can capital be abundant, but time extremely scarce?

The answer lies in the existence of a monetary economy with a system of credit. In such an economy, saving and investment diverge. Inasmuch as they lend, individual economic actors can save without investing. And, inasmuch as they borrow, they can invest without saving. Expressed in terms of stock variables, the individual economic actor's real assets are not equivalent to his or her net wealth. The latter can be greater or smaller than the former. Thus, when we speak of the end of capital scarcity, what we mean is that in terms of the global economy (or, in our analysis, the OECD plus China region), privately desired wealth is greater than productively usable real assets even at a real interest rate of zero. A still greater time gap between the original inputs of labor and land, on the one hand, and the outputs in the form of consumer goods, on the other, does not lead to any greater productivity of the production process.

But scarcity of time is something like an anthropological constant. People do a great deal to increase their life expectancy: to prolong their lives. This is one of the forms taken by the fundamental scarcity of time. And, together with progress in medicine and hygiene, it is in no small measure due to peoples' desire to have more time that life expectancy has increased all over the world and in all likelihood will continue to increase. But not even an increased lifespan, and not even the time that has been gained thanks to it, has led to a diminution in the subjective perception of time scarcity. The perception of time scarcity is perhaps even greater today than in earlier times (this is to say, than in earlier times of peace). Diogenes has moved further and further away from us. This may in no small part be due to the fact that the possibilities for communication transcending spatial distances have increased so much today. The potential for contact with other people and groups of people is thus far greater than it was before. The scarce factor in making use of this potential is just one's own time. This applies for private and professional activities alike.

And it is precisely this urge to have more time, this desire to live longer, that is one of the reasons why capital is no longer scarce, as we have shown in detail in Chaps. 1 and 3 on wealth and desired wealth.

But the divergence between privately desired wealth and economically productive real assets offers an opportunity to accommodate the desire for more time to an even greater extent than has been understood up to now. According to our analysis, under conditions of full employment, this divergence is bridged over by the state, as the only legitimate "Ponzi" scheme operator, having negative net wealth. It thus allows private net wealth to be greater than economically productive real assets. But public debt (as a stock) on which only minimal interest is paid creates the possibility that people will increasingly not want to and not have to work as much for money, that they will thus have more leisure time and hence their private time budget will be greater, and that hence the scarcity of their own time will diminish.

In the following, we will connect this idea to List's idea of the positive externalities of production in emerging economies. We will thus get closer to the utopia of the elves of Cologne. Is the fairy tale a model for the world of the future?

### 12.3 The Chinese Economic Miracle

The discovery of the "saving glut" by Bernanke (2005) and others occurred as a reaction to the hardly orthodox phenomenon of massive capital exports on the part of a then developing country: China. And these capital exports were part of a historical process that can be called the "Chinese economic miracle." In 1980, three-quarters of China's population still lived in absolute poverty. Today, just forty years later, China's per capita income measured on the basis of purchasing power parity is more than a third of that of Germany. In light of its considerably larger population, China is thus a country whose national product is roughly equal to that of the USA. In military and diplomatic terms, China is already regarded as a world power.

These two facts, Chinese capital exports and the tumultuous growth of its national product, are causally linked. It is precisely because of its successful export industries that Chinese productivity was able to increase so rapidly. What China has been striving for since 1980 with its economic reforms is to learn from the West. The (partial) introduction of a market economy served this purpose. And by exporting, Chinese firms learned the business practices that had come to prevail in the rich countries by being successful within the framework of a stable legal and property order.

Anyone who wants to sell successfully in a Western market economy must provide his or her customers, firstly, with goods of satisfactory quality at, secondly, competitive prices and, thirdly, must be able to deliver the goods on time. In the West, sales normally do not happen by bribing the customer's buyer. In traditional societies, the "virtues" of the market economy that we have mentioned here are for the most part only to be found occasionally and often only as rare exceptions. The individualism of modern market societies is scorned. What counts is solidarity in the family: in the clan to which you belong and into which you were born. The duty of loyalty toward the group makes it difficult to break from tradition like a Schumpeterian entrepreneur. Margins are high and price competition is to an overwhelming extent unwanted. Small, inefficient firms are not the exception, but the rule.

China had already been "modernized" by Communist rule after 1948. Medical care improved greatly. The "one child policy" created a good demographic basis for per capita economic growth. But the "Great Leap Forward" and the ensuing Cultural Revolution led the country into a dead end, resulting in millions of people dying of starvation. But Mao Zedong could not destroy the industriousness of the Chinese people, despite all his efforts. This industriousness went "underground" during the Cultural Revolution. When niches of private economic activity were introduced on the agricultural collectives at the start of the reforms pursued under the leadership of Deng Xiaoping, agricultural yields soared. The possibility to study at schools and universities again and to obtain professional qualifications was eagerly used and quickly bore fruit. The initial success encouraged the political leadership to go further with market reforms. The know-how of the Chinese minorities in the neighboring capitalist countries and of Taiwan's predominantly Chinese population was also extensively used.

"Learn from your customer" is a promising business motto in all countries. But it is especially apt when the society of which your customer forms part is far more prosperous and far more productive than your own. And this was the situation in which Chinese firms found themselves after 1980. For China, it was a stroke of luck that free international trade was the prevailing ideal in the Western world. As a result, borders were relatively open for Chinese goods. And thus China was able to learn from its customers in a big way.

We do not want here to sing the praises of China or of Western China policy. There are also, needless to say, dark sides to this cohabitation between democrat countries and a large country with a one-party state. China's rise left not only winners in its wake in the West, but also, of course, losers. The 2016 election of Donald Trump as president in the USA and the referendum vote for Brexit in the UK can be attributed, among other things, to the votes of such losers in the process of globalization. And China's rise increased their number. For it accelerated restructuring in the Western economies. And there is no such thing as growth without losers.

Overall, however, the Western economies have benefited from China's success. Labor productivity in the West increased as low-skilled jobs were eliminated and migrated to China, while, at the same time, being replaced by more demanding, better paid jobs at home. There is no doubt that Germany has been one of the biggest winners in this process of restructuring. It should not be forgotten, moreover, that capital exports from China have lowered interest rates on the global market—and that they have done so with constant employment and rising average wages in the West.

## 12.4 Friedrich List and the Chinese Economic Miracle

Friedrich List fought for German protective tariffs on British industrial goods, so that German industry could undergo a learning process and develop positive externalities. Germany's manufacturing industry took advantage of these opportunities during the nineteenth century and by the end of the century was the equal of Great Britain's. Learning from Great Britain was the order of the day on the Continent at the time. Kaiser Franz Joseph's wife Elisabeth of Austria (better known as "Sissi") had Carl Menger appointed as the tutor of Crown Prince Rudolf. The latter traveled around Great Britain with Menger to familiarize himself with the world's leading economic power and to learn from it (Hamann 1978). After the Meiji Revolution and the associated opening toward the West, Japan also experienced an economic upswing based on learning from the more advanced countries. Friedrich List's ideas also provided inspiration for the Japanese economic policy of the time.

There are thus parallels in economic history to the Chinese economic miracle of the recent past.

If we consider the overall process of all the historical experiments à la List, there is no doubt that they have contributed to accelerating global economic growth while, at the same time, distributing global wealth more evenly. If, as a result of this overall process, East Asia, including China, has caught up with Europe and North America today, then this has both increased global prosperityand distributed it more evenly.

And, on balance, the West, i.e., Europe and North America, have benefited from this process. East Asia supplies the West with goods that are of the same quality, but cheaper. The material standard of living in the Western world has risen thanks to the fact that global trade has mobilized a large number of workers from East Asia to produce consumer and capital goods for the West. And the latter have been paid for with the products of workers in the West, whose capacities would otherwise have been tied up producing less valuable products for the domestic market.

Considering the mutual benefit that both the Western world and the up-and-coming East Asian countries have derived from globalization, we cannot help but ask whether this lesson of economic history should be used so that the rest of the world can also benefit from Listian policies of the same sort. This is the question to which we will turn now.

### 12.5 A Two-Country Thought Experiment

In trade theory, issues of a certain complexity are often first thought through using a two-country model. This is the method that we will use here. We thus divide the world into two regions: the "North" and the "South." The North consists of the economic area that is the special focus of our book: the OECD countries plus China. The South comprises the rest of the world. We now treat these two regions as two countries, each with its own single currency. We call the North's currency the "dollar" and the South's currency the "rupee."

Let X be the South's trade surplus, expressed as a percentage of domestic consumption. If X = 0, then the current accounts of both countries are balanced. If X > 0, then the South exports more than it imports; if X < 0, then the South imports more than it exports. In the spirit of the theory of Friedrich List, we now stipulate that there is a positive correlation between the growth rate g of the South's national product and the South's trade surplus X. Let X be the independent variable here and g the dependent variable: The growth-promoting "learning" of the Southern "student" from the Northern "teacher" is all the more successful, the more the South focuses on exporting to the North. This is precisely the lesson of the economic history of East Asia since the Second World War and especially of China since Deng Xiaoping's pragmatic turn. Figure 12.1 depicts this relationship. For reasons that will become clear below, we turn the dependent variable g upside down: A higher g is below a lower g.

We now add a second functional relationship to this first one: viz. that between the dollar/rupee exchange rate w and the South's trade surplus X. The weaker the rupee is in real terms relative to the dollar, the more competitive the South is and the greater is its trade surplus. This causal relationship is represented in Fig. 12.2.

Note that in Fig. 12.2, the independent variable w is plotted on the vertical axis and the dependent variable X on the horizontal axis.

The third causal relationship concerns the North. It consists of the exchange rate w and the public debt ratio D that is required to achieve full employment in the North. The higher the value of the dollar in real terms against the rupee, i.e., the higher w is, the more competitive is the South and the less competitive is the North. The North's public debt must then be all the higher to allow for full employment. In other words: If the real interest rate is close to zero with stable prices and hence cannot fall any further, then the more capital from the South there is on the Northern capital market, i.e., the stronger the effect of Bernanke's "saving glut," the

Fig. 12.1 Growth as a function of trade surplus. Source Authors' own presentation

Fig. 12.2 Trade surplus as a function of the exchange rate. Source Authors' own presentation

Fig. 12.3 Northern public debt as a function of the exchange rate. Source Authors' own presentation

more public debt must take over the role of satisfying the level of desired wealth. Figure 12.3 shows this relationship.

Note that public debt D is plotted from right to left: the further left, the greater the public debt. As already noted, the public debt in question is that required for full employment in the North.

We thus have three causal relationships, which we can also express as the functions f, g and h. After each formula, we indicate the theoretical source of the causal relationship it encapsulates.

g = g(X): "Learning from customers" (F. List). X = f(w): Neoclassical theory. D = h(w): The theory of the present book.

These three equations contain four variables. Economic policy can now set the value of one of the four variables, in order to generate the values of the other three. We assume that it uses central bank interventions to determine the real exchange rate w. We will discuss how this is done a few sentences further on. If the exchange rate w is given, then market processes will give rise to a trade surplus X and this, in turn, will result in a Southern growth rate g. Furthermore, the North adjusts its public debt D to the exchange rate, so that there is full employment in the North.

Figure 12.4 provides a graphical representation of this reasoning. We choose two exchange rates to compare their effects. The low exchange rate corresponds to the green line connecting the other three variables. The high exchange rate corresponds to the blue line connecting the other three variables.

The graph in Fig. 12.4 is nothing other than a composite image of the three previous graphs. The four variables are depicted on the four lines starting from point zero. The exchange rate w is plotted on the "northern line" that goes upward, the South's trade surplus X on the "eastern line," the South's growth rate g on the "southern line," and North's full-employment public debt D on the "western line."

We have drawn the graph so that it reflects our theory of the negative natural rate of interest. In Chaps. 2–8 of the present book, we show that the North has a negative natural rate. The model of a closed economy that we have used for the

Fig. 12.4 Two alternatives: blue: high <sup>w</sup>; green: lower <sup>w</sup>. Source Authors' own presentation

North corresponds to a Southern trade surplus of zero. We can see from the graph that at an exchange rate that generates a Southern trade surplus of zero, the North's full employment public debt is positive. This reflects our thesis that with stable prices the interest rate cannot fall to the level of the negative natural rate.

We will now briefly discuss the technique for setting the exchange rate. The two central banks have to agree on the exchange rate. They can then steer the exchange rate toward the target value by each of them buying or selling the other currency. Moreover, by announcing the target exchange rate, they can also get other market actors to steer toward this target rate by way of their portfolio decisions. What is crucial is the credibility of the announcement that the two central banks are in agreement about the rate. If the announcement is credible, then the "forward guidance" on the part of the two banks should work. Assuming that the full-employment equilibrium interest rate in the North is approximately zero, monetary and fiscal policy have to be coordinated for the goals of price stability and high employment to be achieved simultaneously. "High employment" or "full employment" is a level of employment that leads to neither inflationary nor deflationary wage pressures. Friedman (1968) coined the term "natural rate of unemployment" for the unemployment that remains.

The thought experiment developed here is not a "model" that can be tested econometrically. Such a model would have to depict a dynamic, i.e., development over time, in order then to be tested using available macroeconomic time series. Our thought experiment belongs rather to the tradition of equilibrium analysis, as it has been practiced for centuries in economic theory. This tradition includes the works of Francois Quesnay, Adam Smith, David Ricardo, Alfred Marshall, Léon Walras, and John Maynard Keynes—and, of course, Paul Samuelson's neoclassical synthesis.

John Hicks's interpretation of Keynes's General Theory using a model with six variables (Hicks 1937) is a similar attempt to represent an economic idea by means of an equilibrium model that is as simple as possible. Like the thought experiment developed here, Hicks's model contained three behavioral equations: the consumption function, the investment function and the demand function for liquidity. The price level and its changes are not explicitly modeled in either the Hicks model of the Keynesian theory or the thought experiment developed here. The Hicks model has to be understood as a model of underemployment, whereby, however, the possibility of a deflationary process is not taken into consideration. Thus, the best way of reading the Hicks model is that it presupposes a stable price level. Price stability is likewise assumed in the thought experiment presented here.

This experiment only makes sense, if, as we showed earlier, the natural interest rate is negative. As long as we are in the "Friedman world," about which we have spoken in the previous two chapters, it is the sole responsibility of the central bank to ensure that there is simultaneously price stability and high employment. The function D = h(w) that we have stipulated here makes no sense in the Friedman world. For as long as the full-employment real interest rate remains positive, it is up to the nation state to decide how high it wants its public debt to be. The domestic interest rate level corresponding to full employment will, however, be influenced by external factors: for example, by the exchange rate.

As one of its key findings, our thought experiment shows that a higher exchange rate of the dollar (= a lower exchange rate of the rupee) is advantageous for both countries: the North and the South. This will be immediately obvious for the South. Inasmuch as the South can make better use of the learning potential of exports when the exchange rate of its own currency is lower, a lower exchange rate also corresponds to higher growth. At the same time, more jobs will be created in the South, so that the incentives for migration to the North will be lower. But the North also benefits. Full employment will be brought about through the required level of public debt. At a higher exchange rate of the dollar, the terms of trade improve for the North. Hence, there is also a positive effect on Northern prosperity. In addition, at a real interest rate of zero and a real growth rate that is to be set as positive, public expenditure can be financed with lower tax rates. For at a growth rate g that is to be taken as given, the steady-state primary deficit that is consistent with stability is higher, the higher the public debt ratio D. At an interest rate of zero, the household income ŵ = w(1 − (r − g)D) 1 , which was defined in the chapter on the natural rate of interest, is, after all, given by ŵ = w(1 + gD). The primary deficit per labor year that is consistent with stability is precisely wgD. Since taxes have a distorting effect that increases disproportionately with increasing tax rates, the prosperity gained per worker is even greater than wgD. The decline in the incentive to immigrate to the North that is associated with the higher Southern growth is also good for the North. The last few years have shown the vehemence with which a majority in the North bridles at immigration from the South.

If we consider the two economies as a whole, both thus benefit from raising the exchange rate. As long as we ignore the distributive effects within the two countries, the latter thus brings about a "Pareto improvement." It is to these distributive effects that we turn now.

### 12.6 The Utopia of a Demand-Oriented Growth Strategy for Developing Countries

In the previous section, we went through a thought experiment that we could call a demand-oriented growth strategy for developing countries. According to our analysis, it benefits not only the South, but also the North. It is, nonetheless, utopian. Northern thinking runs along different lines. The Northern public associates helping the South with "development aid." This has long consisted primarily of financial assistance. As concerns cash flows, the latter is, however, exactly the opposite of the demand-oriented growth strategy for poorer countries that we have presented here. The goals of financial assistance to poorer countries have been internationally agreed upon, but never achieved. Were they to be achieved, then this

<sup>1</sup> Here and in the following few lines x is the "wage rate" and not the rate of exchange

assistance would bring about a reduction of around three-quarters of a percent of Northern GDP in the Southern current account. In keeping with the thought experiment of the preceding section, this means that the growth of developing countries is diminished by this financial assistance. But numerous well-intended charitable campaigns on behalf of poor countries are also counterproductive. A prime example of this are donations of old clothes, which, in reality, make it more difficult for the recipient countries to develop their own garment industry.

Of course, there are also numerous well-organized investment projects, such as those of the World Bank, which contribute to the prosperityof the recipient countries. But this project funding predominantly consists of repayable loans. Moreover, it demands a certain discipline from the recipient country, in the sense of rational, economically efficient use of scarce monetary resources. Its utility consists less in funds being temporarily made available as in the recipient countries learning how businesses can be economically efficient and how to select suitable investment projects that are worth financing.

By contrast, development aid—which is, above all, also a form of aid for the donor country's exports—is problematic from the point of view of the recipient country's growth. Politically, however, it is much easier to get support for it in the donor country. The political economy of development aid is a kind of subform of the political economy of protectionism. One "does good" in a poor, foreign country and thereby creates sales outlets for one's own industry (Easterly 2006). China's Silk Road project is a gigantic example.

Even if the demand-oriented growth strategy for the South that we have sketched out would increase prosperityin the North, it would also be associated with massive restructuring. In a transitional period, of course, numerous jobs would be destroyed in the North: especially in export-oriented industries and industries that are exposed to competition from imports. On the other hand, more jobs would come into being in other industries. In a "Keynes world," however, the jobs argument is paramount for voters. There would be strong opposition to shifting to such a strategy. For the jobs being lost are concrete—they are visible in the present—whereas the jobs that will replace them are abstract and for the moment intangible. Moreover, the champions of the status quo would be eager to seize on the argument that these new jobs are to be created through increased public debt: that it is a matter of replacing already existing jobs by "jobs purchased on credit."

In a sense, it is because its high current account deficit is practically a structural feature that the USA has up to now pursued a policy of promoting other countries' growth. Since, moreover, it is the country that controls the global reference currency, it has never experienced balance of payments problems. The world has been happy to provide the means for financing the current account deficit by exporting capital to the USA. At the same time, these current account deficits also contributed to the fact that China could successfully launch and pursue its export-oriented growth strategy. But the election of Donald Trump as president in 2016 is a signal that such a demand-oriented promotion of other countries' growth no longer reflects the will of the American electorate. And, as discussed already in Chap. 10, this "new protectionism" will also be pursued by his successor Joe Biden.

Our analysis of the political economy of international economic policy in Chap. 10 attributes the worldwide resurgence of protectionism precisely to the phenomenon of the negative natural rate of interest, which, as shown in the present chapter using a two-country model, offers the opportunity to pursue a strategy of demand-oriented growth promotion.

There is no way of resolving this paradox in the short to medium term. Now and for the foreseeable future, there is neither the awareness nor the political will required for a restructuring that would take us in the direction of a demand-oriented growth strategy for the developing countries.

But it is worth at least fighting for the principle of free trade—also for the benefit of the poor countries. For there are numerous barriers to exports from the poor countries to the rich ones.

## 12.7 A Utopian Look into the Future

The digitalization of all human life, along with the rise of artificial intelligence, is perceived as an opportunity, but also as a threat. Many people fear that work is "disappearing." But precisely from the perspective of international competition, the promotion of restructuring toward more digitalization, and, in particular, also artificial intelligence, is being called for. If it really were the case that these technical developments take work away from global society, then we would have to regard promoting them in the interest of national competitiveness as a "beggar thy neighbor" policy like imposing import tariffs. We thus believe that it is important to be able to show conclusively that work in the North is not disappearing.

Our theory of the negative natural rate of interest rate and the reinterpretation of public debt based on it can help us here. In Sect. 12.2, we pointed out that the end of capital scarcity, i.e., the negative natural rate of interest, should not be confused with an end to the scarcity of time. The latter remains. Thanks to modern means of communication, the potential for beneficial interaction is so great that one's own time is, more than ever, the limiting factor. Hence, a reduction in the share of the labor time devoted to wage-earning in a lifetime cannot be regarded as any catastrophe, so long as, despite this reduction, the monetary means are still available to satisfy the individual's consumption wants.

Taken to an—unrealistic—extreme, the productivity gains from digitalization could be exclusively used to reduce wage-oriented labor in the North, so that there would no longer be any real growth of the economy. This would then be in the spirit of the picture that Marx and Engels paint of communist society, in which: "… society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic" (Marx and Engels 1970, 1846], p. 53). But then there is also no longer any need for detailed regulation of production by the state, since people, whether for money or because they simply want to be helpful to others, do work voluntarily within the framework of the division of labor.

We do not have to ponder today what exactly such a society would look like or how large the role of exchange via money would still be in it. As a medium of exchange that balances supply and demand amidst a great variety of goods, it will always be superior to detailed state planning. Nonetheless, the share of goods that are altruistically produced (as opposed to being produced for profit) may, of course, be higher than it is today. Today, there are still an enormous amount of activities for which there is demand, but whose performance is associated with "onerous" labor. These activities are carried out in exchange for monetary compensation and are thus relatively expensive—to a not insignificant extent, also because the state is essentially financed by taxation of the market-mediated division of labor. This is why, in the spirit of the notion of "induced technical change," the potential of digitalization and of artificial intelligence will be directed, above all, at rationalizing these sorts of activities: so that the technical change in question will be such as to lower the disutility of labor.

If this hypothesis is correct, then another side of technical progress through digitalization will be that it tends to rationalize, in particular, low-skilled jobs out of existence. For there is a tight negative correlation between the level of qualifications that is required for an activity and the "onerousness" that is associated with it. Thus, technical change that rationalizes onerous labor out of existence would appear to be a generator of unemployment among the unskilled.

This makes the goal of full employment all the more important. The elimination of low-skilled jobs in favor of the creation of skilled jobs should be carried out in such a way that persons with limited qualifications do not fall into the abyss of unemployment. But this requires a flexible fiscal policy, which, in further developing macromanagement of a Keynesian inspiration, does not shy away from taking on public debt at what we can expect to be persistently low interest rates.

### 12.8 The Gist of the Argument

In this chapter, we have connected the elfin utopia of a world without onerous labor and a further development of Friedrich List's theory. Instead of using the latter to justify a policy of "educational" tariffs, we have reshaped it, in light of the experience of East Asia and especially China, into an argument for free trade—and especially for promoting exports from poor countries to rich ones. By way of List's idea of learning from technically and organizationally superior customers, this should in turn promote economic growth in the developing countries. In order for this strategy to be compatible with full employment in the rich countries, we have to find a different attitude toward public debt than that which has prevailed up to now. For in this context, public debt increases the prosperity of the rich countries. In a sense, onerous labor is "outsourced" to the South and replaced by less onerous labor in the North. We thus come a step closer to Marx and Engel's idyllic conception of a communist society without onerous work.

But, for the moment, this is all just a utopia.

## References

Friedman, Milton. 1968. The Role of Monetary Policy. American Economic Review 58 (1): 1–17. Hamann, Brigitte. 1978. Rudolf – Kronprinz und Rebell. Wien: Amalthea.

List, Friedrich. 1841. Das nationale System der politischen Ökonomie. Stuttgart: Cotta.

Marx, Karl and Friedrich Engels. 1970 [1846]. The German Ideology, ed. C. J. Arthur. New York: International.

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## 13 Concluding Remarks on Economic Policy

### Abstract

The German debt brake is not compatible with the long-term stability of the euro. "New thinking" requires that public debt and price stability are no longer opponents, but rather allies in the Keynes world of persistently low interest rates. The proposed balanced account agreement is made more concrete here: An appropriate target (real) interest rate on the global capital market is between one and 1.5% per year lower than the growth rate of the OECD plus China region. If the actual interest rate is below the target rate, the countries with current account surpluses undertake to increase their public debt period D gradually according to a definite formula. In symmetrical fashion, if the real interest rate is "too high," countries with current account deficits have the duty to reduce their public debt period. The rules of the balanced account agreement replace the debt brake. They are the instruments of sound fiscal policy.

### 13.1 Summary Part 1: Economic Policy in Germany, Europe and the World

In the second part of our book, we have examined some questions on international economic policy that derive from the fact of the Great Divergence. The economic policy of democratic countries is conducted under the conditions of political economy: i.e., under the conditions for having electoral success among citizens. In Chap. 10, we put forward the following basic thesis: The level of the natural rate of interest has a decisive influence on the relative weight of voters' interests as producers and their interests as consumers. With a falling natural rate, the weight of their interests as producers rises. This analysis explains the "Trump phenomenon" and especially the new wave of protectionism. Today, the strongest card that a nation can play in the international game of trade relations is the access of other

C. C. von Weizsäcker and H. M. Krämer, Saving and Investment in the Twenty-First Century, https://doi.org/10.1007/978-3-030-75031-2\_13

nations to its own internal market. And this card is all the stronger, the bigger that internal market is—and the American internal market is very big. Thus, in a "Keynes world," we arrive at new international rules: at a "New Trade Policy."

This led us in Chap. 10 to propose a balanced account agreement: The rules of global free trade (the WTO and related multilateral negotiations on cutting tariffs) should be supplemented and thus politically reinforced by an international obligation for countries to use their fiscal policies to bring about balanced current accounts. In a "Friedman world" with high real interest rates, it is the duty of countries with current account deficits to bring their current accounts into balance by reducing their public debt. In a "Keynes world" with low real interest rates, it is the duty of countries with current account surpluses to bring their current accounts into balance by way of increased public debt. In the "Keynes world," the citizens of all countries will thus be able to understand that international trade and globalization "distribute jobs fairly" around the world. And an electoral majority in each country will thus become convinced that the benefits of globalization and the free movement of goods are greater than the costs.

Such a balanced account agreement merely obliges countries to adopt a fiscal policy that is in their own interest in any case. At low real interest rates, additional public debt is not a burden for the future and future generations in countries that are presently running current account surpluses. This is the charm of the "dynamic inefficiency" that goes along with these low interest rates: More consumption today does not have to be purchased with less consumption in future. And more public investment today is even an additional bonus for future generations. And vice versa: At the high real interest rates of a "Friedman world," the obligation for countries with current account deficits to reduce their public debt is in their own interest in any case.

Chapter 11 was, above all, about Europe. One of the effects of the euro is to eliminate countries' temptation to obtain (temporary) competitive advantages for their own industry by devaluing the national currency. In the Keynes world, it is thus also an obstacle to concluding bilateral "deals" with non-European powers at the expense of the other EU member states. In this way, the euro is also a pillar of the European single market. But this is particularly significant in the age of the "New Trade Policy," because, given the size of the European single market, access to it is a particularly strong card in international trade negotiations.

To stabilize the euro politically, the balanced account agreement has also to be applied to the individual current accounts of the countries in the eurozone. Populists in the Mediterranean eurozone countries see the euro as a German tool for selling German goods as cheaply as possible at the expense of jobs in the South of Europe. As crude as the economics of this view may be, one has to acknowledge that it is right on one point, which is also emphasized by the US government: The weakness of the southern euro countries makes the exchange rate of the euro far lower than, for example, that of a euro limited to the northern members would be. And this helps German exports.

Moreover, the following has also to be taken into account. Let us assume that nothing changes in the basic outlines of the present fiscal policy of the eurozone countries. What then would a euro area in which there is pervasive full employment look like? Given its demography, it would undoubtedly be characterized by a massive excess of private saving (in the conventional sense, i.e., not including contributions to social security programs) over private investment, which would thus be reflected in high trade surpluses. But this precisely will not come to pass, because such a strong currency would appreciate massively. And this would make precisely these trade surpluses impossible. And in the age of the "New Trade Policy," holding the exchange rate of the euro low by way of massive dollar purchases by the ECB is out of the question. The USA (and soon probably China as well) could "veto" such a move, threatening otherwise to impose tariffs in retaliation.

In light of the success of politicians like Matteo Salvini, we cannot expect a country like Italy to remain in the euro, if this impossibility of full employment in the euro area becomes widely known. But this means that Germany's debt brake is not compatible with the stability of the euro. Only a significantly more expansionary fiscal policy in the "strong" euro countries can save the euro in a world that can be expected to remain a "Keynes world" for the foreseeable future. The "strong" euro countries, led by Germany, would thus have to increase their deficits, in order to allow the "weak" euro countries to reduce their debt levels without excessive "austerity" and, moreover, to find remaining in the euro area "enjoyable." It is, in a sense, "by accident" and not thanks to wise planning that Covid-19 induced public deficits are leading to a higher German debt period D.

In the context of a changed fiscal policy in the spirit of the proposed "balanced account agreement," Germany can, of course, insist that it will not intervene on behalf of the public debt of other eurozone countries. This would (finally!) fulfill a promise that Germany's Christian Democrats and other German parties made in the late 1990s, when pleading with German voters not to get into a funk because of the departure of the D-mark.

At low interest rates, a more expansionary fiscal policy could be used for public investment that is primarily aimed at bringing about German demographic renewal. We refer here to Sect. 11.8. For us, it is a paradox that when the United Nations is forecasting considerable growth in the global population for the entire twenty-first century, the official German outlook, based on the population projections of the Federal Statistical Office, is that of a secular decline in population. It seems to us that greater demographic realism is required here. A comparatively well-functioning country with a competitive economy cannot avoid being involved in the migratory movements that are increasingly occurring around the world. The German state (including federal, regional and local authorities) should not put its head in the sand, but rather actively shape net immigration—also for the benefit of the native population—and it should invest massively in doing so. It is well known that Germany has a great need for skilled workers at the moment. And for demographic reasons, it is even more evident that in future, Germany will only be able to obtain a sufficient number of skilled workers via immigration from other countries.

If Germany decides to join such a balanced account agreement, then there will be a public debate about how the required deficit spending should be used. Depending on the political orientation of the government, it could be used for increased efforts to improve education, increased expansion of rail and road networks, increased efforts to improve the health care system, increased efforts to give the Bundeswehr a genuine operational capability, increased efforts to promote the transition to renewable energies or, as proposed here, increased efforts to foster demographic renewal. Considering the relative merits of these various goals would require a different book than this one.

## 13.2 Summary Part 2: Stability and Utopia

The Great Divergence described in the first part of our book gets expressed in the Fundamental Equation of Steady-State Capital Theory:

$$L + T = Z - D$$

The period of production T, i.e., relative real capital requirements, remains constant over time; the waiting period Z, i.e., relative desired wealth, increases over time—and it does so worldwide. The growing divergence between the relative wealth desired by private persons and constant relative capital requirements has to be bridged over by a growing public debt period D, if the goal of price stability at full employment, i.e., of a non-negative real interest rate, is to be maintained.

If our analysis is theoretically and empirically correct, then it requires "new thinking" about the long-term economic and social conditions for an "open," democratically constituted society. In Chaps. 9 and 12, we try to make a start in such "new thinking." On the basis of historical and also very recent experience, Chap. 9 examines some (but by no means all) functional conditions of the democratically constituted Open Society. The structure of the welfare state is key here. Reduced to a simple formula, the welfare state is a condition for the coexistence between a democratic social order and the only known form of economic life that really works and constantly brings about material progress: the market economy.