The EconomistNovember 9th 2019 Finance & economics 592
1high unemployment, debt and a current-
account deficit, it seems more southern.
However, southerners rely less on fi-
nancial flows from the north. In many
places balance has replaced imbalance
(though stocks of debt are still large). Con-
sider, for instance, the flow of funds be-
tween Germany and Spain. Spain’s current-
account deficit with Germany has nearly
closed. Mirroring that, net capital flows
have shrunk. In 2006 German investors
ploughed a net €50bn ($63bn) into Spain.
Last year that fell to €3bn. The reversals
partly reflect relative improvements in the
south’s competitiveness. Between 2015 and
2018 German labour costs grew more than
twice as fast as those in the south.
Labour flows from south to north. Fe-
derico Fubini, an Italian journalist, com-
putes that Germany received 2.7m mi-
grants from other eu countries in 2008-17,
up to a third of whom hail from the south.
Countries such as Greece and Portugal have
lost young and relatively highly educated
workers. That means a large transfer of
skills and investment in education.
Northerners have other grievances.
target2 balances, for instance, are fre-
quently deemed newsworthy in Germany.
In 2018, as its credits in the system ap-
proached €1trn (30% of gdp), some econo-
mists claimed these represented “stealth
bail-outs” of countries such as Italy and
Spain, which had large debits. Central
bankers responded that much of the in-
crease reflected arcane accounting made
necessary by qe. If a southern central bank
buys a bond from an investor based outside
the euro area, but with correspondent-banking links to Frankfurt, it adds to Ger-
many’s target2 credits. Daniel Gros of the
Centre for European Policy Studies, a
think-tank in Brussels, points out that
these would need to be settled only if the
currency union were to disband wholly.
But the resumption of asset purchases
means that Germany’s credits will probably
rise further, causing more complaints.
An abiding grumble concerns the ef-
fects of monetary stimulus. Spanish and
Italian banks are by far the biggest users of
the ecb’s cheap funding scheme for banks.
qe depresses bond yields, meaning lower
interest bills for more indebted govern-
ments. But monetary policy is not a zero-
sum game between north and south, says
Marcel Fratzscher of the German Institute
for Economic Research. The German gov-
ernment also benefits from lower interest
costs. Northern countries, which are more
export-oriented, have gained the most
from a weak euro. And less stimulus would
have been needed in the first place had Ger-
many and the Netherlands spent more at
home, pushing up euro-zone demand and
inflation, rather than building up huge cur-
rent-account surpluses.
All these divisions make reforming the
currency union a tortuous process at best.
On November 5th Olaf Scholz, Germany’s
finance minister, said that he would back a
common deposit-insurance scheme for
the euro zone. But the catch—and a very big
one—is that banks in the south would need
to back their large holdings of national
sovereign debt with more reserves. North-
erners’ fears of transfers to the south are
not going away. 7So near yet so farSources:Eurostat; Bundesbank; The Economist*North=Austria, Finland, Germany, Netherlands.South=Greece, Italy, Portugal, Spain
†GDP-weighted average4035302520South†FranceNorth†Unit labour costs
1999=100GermanyFORECAST
ItalyFranceSpainGreece1999 2005 10 15 2016014012010080Euro-area averages*
Real GDP per person
€’000, 2010 prices1999 20181251007550250South†FranceNorth†Current-accountdeficitwithGermany
% of GDPItalyFrance
SpainGreece1999 2005 10 1815-3-2-10Unemployment rate
%
151050SouthFranceNorthGovernment debt
% of GDPT
he tradeconflict between China and
America has been a clash not just of
giant economies but of utterly different
public negotiating styles. In one corner are
President Donald Trump’s tweets, in which
he veers between heaping praise on China
and declaring that he has pummelled it. In
the other is a Chinese bureaucracy that has
stuck doggedly to the same message: tariffs
must be removed for the two countries to
reach a trade agreement. A mini-deal,
hashed out last month, is shaping up to be a
mini-test of their contrasting approaches.
The outline of the mini-deal—or, as Mr
Trump put it, the “substantial phase-one
deal”—seemed clear enough. China would
buy American agricultural products, and
America would hold back from slapping
yet more tariffs on China. With this basic
agreement under their belts, the two com-
batants would move onto weightier topics
such as China’s support for its strategic in-
dustries. But two problems have since
emerged: one predictable, one not.
As was foreseeable at the time, the lack
of detail about the mini-truce concealed
big differences. Mr Trump said that trade
talks had been “a love fest”, and that China
would buy $40bn-50bn in farm goods from
America, more than double the level before
the trade war. But the more he gloated, the
more China appears to have seen an open-
ing to push for more. According to multiple
reports, Chinese negotiators have demand-
ed that to complete the mini-deal, America
must remove some of its existing tariffs,
not just refrain from new ones.
China’s gambit might just pay off. On
November 4th a Trump administration of-
ficial reportedly said that a phase-one deal
between America and China could roll back
the 15% tariff imposed on September 1st, on
$112bn of goods. China could be offering
some sweeteners such as a purchase of liq-
uefied natural gas, which Wilbur Ross,
America’s commerce secretary, hinted at
on November 5th. But the tariff reduction
would be an American concession. The
previous stance of Robert Lighthizer,
America’s chief trade negotiator, was that
tariffs should remain until China proves
that it is honouring whatever deal is struck.
The unpredictable complication was
Chile’s big protests. Mr Trump and Xi Jinp-
ing, his Chinese counterpart, had hoped to
seal their mini-deal on neutral ground at a
summit of Asia-Pacific countries in Chile
in mid-November. But the organisers haveSHANGHAI AND WASHINGTON, DC
China tries to squeeze more out of a
mini-deal with AmericaTrade warPhase one, scene
two