Europe’s leaders are being taught lessons that they refuse to learn.  The Greek economy was always too weak to join the euro zone; now that it is – as a consequence - flat on its back and weighed down by debt, the “remedy” imposed on them by their European partners is an enforced dose of yet more austerity that will make it quite impossible for them ever to pay off their increased debts.

The consequences for the European – and ultimately the world – economy will be dire.  Greece is only the beginning; a recession-infected Europe now looks inevitable.  Already, even in remote New Zealand, we are being warned that the euro zone’s difficulties will mean a worse economic outlook for us in future years.

 But before we put the entire blame for our woes on the Europeans, let us recognise that the bizarre European determination to treat austerity as the remedy for recession is shared by our own leaders.  We seem to be locked into the same ideological deep-freeze.

We are, after all, now entering our fifth year of either negative or minimal growth.  We, too, have insisted that the key to securing a recovery that seems constantly to disappear further over the horizon is to close part of our economy down.

 Our principal goal, it seems, is not to reduce unemployment and get the economy moving, but to cut the level of government economic activity.  The result?  The economy continues to stultify and the government deficit proves increasingly stubborn and difficult to manage.

But our economic problems are not defined by the recession alone; they are more deep-seated than that.  The simple truth is that, despite the great advantages of buoyant export markets and record commodity prices, we continue to live well beyond our means.

We make up the gap between what we earn and what we spend by borrowing from overseas and by selling off our assets to foreign owners.  We have been doing this for decades, but the price we pay for this indulgence is getting increasingly steep.  We have to pay an interest rate premium to foreign lenders, if they are to continue to lend to us, and we also have to pay to foreign owners – across the exchanges – the profits on the assets we no longer own, with the result that our perennial trade imbalance gets even harder to manage.

More and more of our national wealth goes overseas.  We have less and less control over our own economy, as the proportion we actually own diminishes.  High interest rates not only inhibit domestic investment but produce an overvalued dollar that prices our goods out of international markets, including our own, and reduces our return on those goods that we do sell.

We have been travelling down this no-exit road now for nearly thirty years.  Yet our policy-makers still set their faces against any change of policy.  We continue to assert that the only focus of macro-economic policy must be to control inflation, even though the measures we use to do so are poorly focused and slow-acting, and actually make our real problem much worse.

What is our real problem?   It is certainly not inflation.  It is that we are basically uncompetitive.  We have steadfastly ignored the fact that the world has changed and that rapidly developing economies like China, India, Korea, Taiwan and Singapore are now super-competitive economic powers, determined to build on that huge advantage by holding down their exchange rates and becoming ever more competitive.

They have rapidly built the strength of their productive sectors and have earned huge trade surpluses which have allowed them to buy up the assets (including our own) that they will need for further development.  Many of them already enjoy living standards better than ours and pay wages and salaries that are higher.

We, on the other hand, are arrogant (and stupid) enough to believe that competitiveness does not matter, and that we can – in defiance of economic rationality - continue to push up our exchange rate with impunity.  By focusing on inflation, to the exclusion of other objectives, and using interest rates and an overvalued dollar in the attempt to control it, we make it inevitable that our lack of competitiveness gets worse. 

The result is that we dare not grow – even in a recession - for fear of balance of trade constraints, and are reduced  - for as long as we can find willing lenders and buyers - to financing our unsustainable consumption by overseas borrowing and selling off what little remains of our assets. 

It is time that we realised that competitiveness produces improved productivity, and not the other way round. We cannot hope to innovate and develop if we are constantly fighting the headwind of being uncompetitive.  We should no longer be tinkering at the margins, with largely ineffectual tax changes and constant but ineffectual exhortations to improve productivity; it is time to make a step change by making competitiveness the focus of policy.

But our leaders seem blithely unaware that their out-dated nostrums are destroying our economic future.  The exchange rate, and issues of competitiveness, it seems, are no-go areas for discussion.  They prefer their own simple certainties to the evidence before our eyes.

Bryan Gould

12 February 2012

This article was published in the NZ Herald on 14 February