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. Read more

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

One of the salient characteristics of Germany’s policy-making in the eurozone crisis ‑ or, more precisely, of the German chancellor, Angela Merkel ‑ has been the view that time is on its side. In a noteworthy speech delivered in Italy on June 2 2012, George Soros, the investor and philanthropist, has challenged this notion directly.

In the penultimate paragraph, Mr Soros writes:

“. . .  The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work for Europe today. Germany then could enjoy an export-led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs, which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fuelling a real-estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it (My emphasis).”

I believe Mr Soros is right on the amount of time left. Read more

Last week I wrote a column entitled The riddle of German self-interest. To my surprise, it received a lengthy response from a senior and highly respected official of the German finance ministry. I am very grateful for this reply, because it clarifies the German finance ministry’s position and raises a number of profound issues.

In the interests of clarifying these issues further, I comment below on some of the statements made in that letter. Read more

“Fiscal easing and further use of the government’s balance sheet should be considered if downside risks materialize and the recovery fails to take off. In particular, if growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered. Under these circumstances, gains from delaying fiscal consolidation could be larger as multipliers are estimated to move inversely with growth and the effectiveness of monetary policy. To preserve credibility, reconsidering the path of consolidation should be in the context of a multi-year plan focused on further reducing the UK’s large structural fiscal deficit when the economy is stronger and taking into account risks to sovereign borrowing costs. Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending.”

The above quote is from the concluding statement of the International Monetary Fund’s mission to the UK for the so-called Article IV Consultation, released on 22 May 2012. Read more

A statue holds up a symbol of the euro in front of the European Parliament building in Brussels. Getty Images

A statue holds up a symbol of the euro in front of the European Parliament building in Brussels. Getty Images

The previous two posts Part 2 and Part 1 tried to explain why the sovereign debt of eurozone countries seem to be far more fragile than that of countries with their own central banks.

This issue is a relatively new one, so far as I know. But it is extremely important.

One of the questions raised in the subsequent discussions is why the possibility of illiquidity-induced default (as in the Spanish sovereign debt market) should be any different in impact from the possibility of a devaluation and inflation (as in the gilt market).

I have three suggested answers. Read more

In my most recent post, I investigated whether fiscal contractions were expansionary. The answer seemed to be unambiguously negative: eurozone member countries that had undertaken large cyclically adjusted fiscal contractions had also experienced larger declines in gross domestic product. This being so, a question obviously follows:

Does fiscal contraction improve actual fiscal outcomes or are the effects on GDP so dire that outcomes do not improve? Read more

Part 1

What is the correct approach to fiscal and monetary policy when an economy is depressed and the central bank’s rate of interest is close to zero? Does the independence of the central bank make it more difficult to reach the right decisions? These are two enormously important questions raised by current circumstances in the US, the eurozone, Japan and the UK.

Broadly speaking, I can identify three macroeconomic viewpoints on these questions: Read more

The answer to this question is an unambiguous “yes”. It is not possible, it is true, to have a currency crisis inside a currency union, provided the currency union is credible, though currency risk returns, implicitly, as soon as it is not. But balance-of-payments and currency crises are NOT the same thing. A balance-of-payments crisis can show itself in a currency union in one (or, more likely, both) of two ways: as a credit crisis or as a regional economic slump.

The fundamental point was made by the British economist, Tony Thirlwall, in a column entitled “Emu is no cure for problems with the balance of payments”, in the Financial Times of October 9 1991. In this he was responding to the then widespread argument that “we don’t talk about the balance of payments difficulties of Scotland, Wales and the North of England, or of Sicily and Apulia. But this does not mean that they don’t exist.”

Let us start at the most basic level: that of the individual. Can individuals have a balance of payments crisis? Certainly. Read more