Do current account deficits matter inside a monetary union? The answers are “no” and “yes”: no, because there cannot be a currency crisis; and yes, because there cannot be a currency crisis. Where unsustainable divergences in competitiveness emerge, adjustment occurs largely through changes in relative nominal costs, particularly of labour. The bigger the required adjustment, the greater the pain.

The challenge posed by divergent competitiveness inside the eurozone has been widely discussed for the case of Italy. But Spain is even more interesting. Spain, unlike Italy, has been an enormous economic success; Spain, unlike Italy, has a huge current account deficit; Spain, unlike Italy, has enjoyed a vast construction boom. But Spain, this time like Italy, has low productivity growth and deteriorating external competitiveness.

The question, then, is not whether adjustment will happen, since it is sure to do so. It is how it will happen.

The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.

By Lawrence Summers

Three months ago I was able to write in this space that in economics “the main thing we have to fear is the lack of fear itself”. This is no longer true today. With clear evidence of a crisis in the subprime US housing sector, risks of its spread to other credit markets, sharp increases in market volatility, reminders of the fragility of global carry trades and signs of slowing economic growth, there is enough apprehension to go around. While it would be premature to predict a US recession, there are now strong grounds for predicting that the US economy will slow down very significantly in 2007. Whether in retrospect 2007 will prove to have been a “pause that refreshed” a nearly decade-long expansion like the growth slowdowns in 1986 and 1995 or whether it will see the end of the expansion is not yet clear. It is clear though that the global economy has been relying on the US as an importer of last resort; that the US economy has been relying on the consumer for its primary impetus; and that until now consumers have been encouraged to spend their incomes fully or more than fully by being able to access the wealth in their homes.

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“Chindia” is the word coined by the Indian politician, Jairam Ramesh, to denote the two Asian giants that contain 38 per cent of the world’s population between them. Nor is size their only similarity. Both are heirs of ancient civilisations; both were, until recently, desperately poor; and both are among the world’s fastest growing economies. Yet the differences are also striking. By looking carefully at them one can learn more about their prospects for continued growth. The economists’ technique of growth accounting helps shed a bright light on the story. A recent paper by Barry Bosworth and Susan Collins of the Washington-based Brookings Institution does just that*. It compares performance over the 1978-2004 period, but the years since 1993 are particularly interesting, since they succeed India’s post-1991 reforms. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.

The European Union has been an astonishing success. It has helped create prosperity and peace across a continent devastated by the two most destructive wars in human history and then divided by an iron curtain. Its challenge now is to adapt to the world of the 21st century.

On March 25 1957, the six original members (Belgium, France, Germany, Italy, Luxembourg, Netherlands) signed the treaties known as the treaties of Rome. Today, after successive enlargements, the EU has 27 members, with an aggregate population of 493m that generates 30 per cent of world gross product, at market prices. If imitation is the sincerest form of flattery, then enlargement is flattery’s apotheosis. Each wave of members has chosen to absorb not just the EU’s values, but its body of laws, the celebrated acquis communautaire, recently estimated at 170,000 pages of legislation.

The great achievement of the EU is to establish the co-operative “service state” as the norm across the continent. Such a state sees its purpose as serving its citizens, not dominating them, and as co-operating with other states, not dictating to them. The genius of the founders was to realise that a law-governed market economy was the means to this end. It would do so by binding the discretionary interventions of each, thereby creating predictability and stability for all.

The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.

Is the market turbulence of the last week telling us something or is it no more than “a tale told by an idiot, full of sound and fury, signifying nothing”? Some analysts are prepared not only to explain day-to-day movements in markets, but to predict them. I am neither clever enough for the former, nor rash enough for the latter. I am prepared, however, to make four statements: first, a period of market volatility is welcome; second, core equity markets do look overvalued; third, that this does not appear to be the case is due to the extraordinary condition of the world economy; finally, the big question is how long those conditions will endure.

Any long period of market stability encourages speculation. Taken to excess, such risk-taking, particularly when fuelled by huge amounts of borrowing, can create significant instability. At a time when asset markets are generally buoyant and risk premiums low, the need for a reminder of riskiness is valuable. It is far better, as natives of San Francisco must know, to suffer a series of mini-earthquakes than a long period of calm, followed by a huge one. Similarly, euphoria in markets is dangerous. From time to time it needs to be punctured, before bubbles reach the proportions seen in Japanese markets in 1990 and US markets in 2000.

The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.