EU

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. Read more >>

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.

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EU flagOne of the most interesting set of questions to arise out of the Greek crisis in the eurozone is whether – and, if so, what – institutional changes are needed to make it easier to manage disarray of this kind.

Some would argue that there is really no problem. When countries within the eurozone get into difficulty, they are supposed to look after themselves. The European Central Bank should continue to look at the performance of the economy as a whole. Meanwhile, given the “no bail-out” provisions of the treaty, each country must be on its own. If a country cannot raise the money it needs to finance its government, it has no choice but to raise taxes, cut spending and, in extremis, restructure its debt. The latter is likely to mean a deep recession, not least because the private sector is likely to be badly affected by a sovereign default. This would be particularly true for the financial sector. Read more >>