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The Eurozone’s export-oriented policy regime and pursuit of trade surpluses remains thoroughly puzzling. Rooted in overly strict fiscal policies, inequality and underinvestment; undermining growth and contributing to trade tensions– it defies economic self-interest. This paper develops an analytical framework to confront this puzzle. It argues that these policies are self-harming, but are nonetheless pursued, because of three fallacies that obscure the cost-benefit calculus attached to them. These fallacies are rooted in the empirical problem of observational equivalence: the same observed surplus can be driven by different underlying processes, and its net benefit will depend on our assumptions about these drivers. The first fallacy is mistaking external enablers for domestic competitiveness—interpreting export success to be linked to domestic reform, when it was largely explained by better links to faster growing trading partners. The second fallacy is mistaking weak imports for strong exports—interpreting surpluses as ‘winning’, even when they are not driven by superior exports but sluggish imports. The third fallacy is mismeasuring multinational firms’ contributions to national exports—interpreting profit shifting and assets stashed in low tax jurisdictions as export performance. Germany and Ireland, as paradigmatic ‘success cases of austerity’, are used to expand the argument.

Foundering on fallacies: theorizing the Eurozone’s self-harming mercantilism