Wednesday 12 May 2010

In good company

"So why not also in Europe under the euro? As I see it, domestic German policies, perhaps aimed at absorbing East German unemployment, forced a structural trade surplus. The strong euro, along with the automatic recycling of Germany’s large trade surplus within Europe, ensured the corresponding trade deficits in the rest of Europe – unless Europeans were willing to enact policies that raised unemployment in order to counter the deficits. As long as the ECB refused to raise interest rates, southern Europe had to accept asset bubbles and rapidly rising debt-fueled consumption. // This couldn’t go on forever, or even for very long. Now southern Europe is paying the inevitable price, and of course the moralists are accusing the south of being shiftless and lazy, confusing the automatic balancing mechanisms in the balance of payments with moral weakness." See here


  1. That is what I've come to conclude over the last few months: it is in Germany's best interest to fix this mess, or else they may become the next victim.

    Also it comes to mind some factories Portugal and others had to close in order for Germany to keep their steel industry safe (after joining the EU). They were obviously "replaced" by other factories attracted to the low wages, which in times of crisis are the first ones to close. Basically we were left with lots of expendable industry owned by German companies, which would close those branches in order to keep German factories open.

    All this makes me sad, since I hoped people were almost ready to embrace a supra-national identity and replace the emphasis on their nationality with emphasis on the EU.

    Could a full fledge Federation be a radical solution to this mess (with a common fiscal policy)?

  2. I agree with the analysis in this post.
    And I agree that countries should not be judged on moral grounds. What happened with the divergence between Northern and Southern European countries was probably inevitable (at least of they did not change their economic and fiscal management)

    But if countries should not be judged on moral grounds, politicians should and MUST be judged, at least by voters.

    When South European countries joined the Euro they knew (or their officials - central bankers, governement officials, etc. - should have known) that the charter for the eurozone was that of a strong currency. The politicians profited from the margin given by the credit expansion made possible by the euro to promote populist policies. Maybe even worse some in the political class benefited personnally from the situation.
    I cannot help remembering the numerours times that politicians and even governements asked for the ECB to lower interest rates!!

    When you say in the post "As long as the ECB refused to raise interest rates, southern Europe had to accept asset bubbles and rapidly rising debt-fueled consumption". Fortunately the ECB remained independent (at least until now, let's see from now on).