eurozone

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. 

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. 

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. 

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.