A commenter, A.N., objects to my argument that the big reason for the explosion in government bond yields in Spain was not its debt dynamics, which are remarkably like the UK’s, but because it does not have a lender of last resort, as the UK does.

He responds that the debt dynamics of France and Germany were just like Spain’s. But they were not similarly punished. In any case, the facts are clearly otherwise. These are the relevant data for the three mentioned countries. It is quite clear that Spanish debt dynamics are far worse than those of France and Germany. 

Roger Altman of Evercore partners is a friend of mine, a distinguished public servant and a respected financial expert. But his column “Blame bond markets, not politicians, for austerity” is, in my view, gravely mistaken. 

I recently looked at what happened to private financial balances inside the eurozone. Today’s post looks at what happened to the current account deficits. It fills out the broad story of the eurozone’s across-the-board shift into becoming a very large capital exporter. It is complementary to an excellent post by Gavyn Davies, who addresses the sources of the ongoing adjustment.

As it happens Michael Pettis, professor at Peking University, and author of the excellent book, The Great Rebalancing (Princeton and Oxford: Princeton University Press, 2013) has a complementary post.

In this, he argues that Spain had no choice over what happened to it during the 2000-07 period, given the deliberate policies of Germany, which were aimed at generating a large current account surplus (“improving competitiveness” being the normal way of talking about this form of structural mercantilism). If one’s principal trading partner is seeking to generate a huge current account surplus and so exporting capital, he argues, then a country is effectively forced into running the counterpart deficits, whatever the consequences.

I agree with this analysis of what happened. Indeed, I have argued along these lines for several years, in trying to explain the roots of the eurozone crisis, which is a balance-of-payments cum financial crisis, of which fiscal deficits are a symptom, not, except in the case of Greece, a cause. 

What is to be done? This question has to be asked of UK economic policy. Only the complacent can be satisfied with what is happening. Yes, the 1 per cent increase in third-quarter gross domestic product is welcome. But GDP stagnated over four quarters and was 3.1 per cent lower than in the first quarter of 2008.

I remain convinced that the decision to move towards fiscal austerity so sharply in 2010 was a huge error. A salient aspect of the mistake was that the UK reinforced the move towards austerity in the EU. In an article entitled “Self-defeating austerity?” published in the October National Institute Economic Review, Dawn Holland and Jonathan Portes argue that UK GDP could well be 4.3 per cent lower this year and 5 per cent lower in 2013 than it would have been without these consolidation programmes, including the UK’s. Moreover, in 2013 the UK’s ratio of public sector debt to GDP might be 5 percentage points higher than it would have been without the co-ordinated contraction. This is a step forward and maybe two steps back.