John Weeks — Eurozone’s So-Called Recovery Masks A Dark Secret: Mercantilism

Broad opposition in Europe to the Trans-Atlantic Trade and Investment Partnership has prompted its supporters to summon the “protectionist” spectre. In response to the criticism of TTIP by US presidential candidates and progressive politicians in Europe they, according to media reports, are talking up the end of “free trade” that has allegedly brought so many benefits (to so few). By contrast, we find little reporting of the considerably stronger spread of EU mercantilism, the witch’s familiar of fiscal austerity. Adam Smith defined mercantilism as government policy that seeks to “restrain imports and encourage exports”. It is as applicable to current EU austerity programmes as it was to Smith’s world three centuries ago.

In the 18th century governments used direct restrictions on imports and other market interventions in an attempt to achieve permanent trade surpluses. Governments implement the 21st century version of mercantilism with different policy instruments. In the place of direct restrictions on trade we now see real wage reductions, manipulation of business taxes, and currency depreciation through loose monetary policy (so-called quantitative easing and negative interest rates).

This “market friendly” version of mercantilism allows the ideologues to maintain the fiction of “free trade” while pursuing the mercantilist goal of persistent trade surpluses. This perverse inversion of rhetoric seeks to justify recovery in Europe based on beggar-thy-neighbour policies.…

For over two hundred years opposition to mercantilist policies characterized the economics profession almost regardless of theoretical or political orientation. I can recall that when I took international trade theory many years ago at the University of Michigan, my professor (PhD under Milton Friedman) contemptuously dismissed concerns about a trade deficit. He considered a deficit a positive outcome, allowing a country to consume more than it produced.

How times have changed. The seizure of policy debates by advocates of austerity has rehabilitated trade surpluses from mercantilist delusion to competitive virtue. For the theologists of austerity the national equivalent of household prudence means consuming and investing less than a country produces. Contrary to common sense the new economic theology considers this squandering of national resources as “saving”.…

Export-led growth is the bad economics of the early 18th century. Reviving it in pursuit of persistent trade surpluses will fatally undermine the euro zone, then the European Union itself.