Tuesday 1 February 2011

Economic history

Probably the most important prediction of the current challenges of the Portuguese economy - and including many suggestions for reform: the address delivered at the 2006 Bank of Portugal conference on economic development by Olivier Blanchard, then at the MIT, now at the IMF.

The paper was subsequently published by the Portuguese Economic Journal in early 2007. The abstract is:

"In the second half of the 1990s, the prospect of entry in the euro led to an output boom and large current account deficits in Portugal. Since then, the boom has turned into a slump. Current account deficits are still large, and so are budget deficits. This paper reviews the facts, the likely adjustment in the absence of major policy changes, and examines policy options."

1 comment:

  1. Its incredible to read a paper where you see mentioned a current account deficit without any mention to the exchange rate. Instead we talk about competitive desinflation, but does that make any sense?

    In 1/1/2000 the 1 usd was 0.993048 EUR, in 1/1/2005 it was 0.74206 Euro (-25%) and in 1/1/2011 0.748391 (-25%).

    In the 2005 the British pound lost 11% of its value against the euro in 2000 and 27% in 2011.

    The Chinese Yuan -31% in 2005 and -11% in 2011.

    Need any more arguments be presented? How can a competitive desinflation tackle such major differences in currencies?

    No we don't need competitive desinflation, it would be impossible to compensate for -25% of the dollar depreciation or the -11% of the yuan, what we need is one of two things, either a strong Euro devaluation, or strong protective measures against non EURO imports. This way countries with lower labor costs (and there are no doubts periphery countries have lower salaries) can be competitive and attract investment from countries with higher wages, and less elastic euro/current balance elasticity.

    By the way, IMHO its criminal to say the 1990 boom in the periferic countries was due to the EURO perspective. This countries growth was higher before the Euro adoption was even mentioned, so this statement alone, IMHO, proves the authors biase in the analysis.

    What is happening to Portugal and the Pigs in the 2010's is what happened top the rust steel area in America during the 90's. Low wgaes will not solve anything, it will increase desertification.

    Devaluate the Euro, impose capital restriction and stiffer non Euro area tariffs, and IMHO the problem will be mitigated, its economy 101.

    PS: I'm not advogating for competitive devaluation, but to the restauration of the Euro/USD parity.