The European Situation, June 11, 2011The main argument is as follows:
“Since the alarm bells about the debt of Greece, Ireland, Italy, Portugal and Spain were first rung, there have been a series of deals, bailouts, negotiations, austerity measures, and on and on... but still the crisis pops back into life. … In all of the above cases, the economies were living on too much borrowed money, and that borrowed money shaped the structure of the economies. The direction of that money was into consumption, and the consumption beyond the actual income was unsustainable. However, a county that has lived on borrowed money has developed an economic structure to support the consumption of the wealth creation of other countries. In simplistic terms, this translates into the means of importing and distributing goods and services paid for by the wealth creation of other countries.”The complaint here appears to be that excessive private debt in the EU was causing trade deficits and importing of goods from other countries.
But what type of analysis of the EU neglects to mention that Germany – the largest economy in the EU – has a huge trade surplus and current account surplus, and massive manufacturing base? Germany, along with North Europe, trends to give the whole EU a trade surplus or trade balance. Since the EU is supposed to be run as a whole economic unit, the trade deficits in the rest of the union are no more a problem than the state trade deficits inside certain areas of Germany.
The main trouble with the EU is that a monetary union without federal fiscal policy is a disaster, and this is what we are seeing happen as some EU nations are broken on the cross of gold that is the Euro. Because of the neoliberal monetary system, EU countries like Ireland, Greece and Spain cannot devalue their currencies or engage in aggressive bond purchasing programs to drive down their bond yields and make government deficits (and fiscal stimulus) easier to sustain. Their policy options are reduced to austerity and internal wage and price deflation. And this is the road to serfdom, as can be seen plainly in Latvia. Internal wage and price deflation only results in debt deflation, mass unemployment, and the collapse of perfectly healthy sectors of the domestic economy.
We can contrast the export-led growth in Latvia that has come at a price so brutally high that no sane human being could tolerate it, with the export-led growth in the UK, where sterling depreciation (with QE and Keynesian stimulus for the domestic non-tradable sector) has seen a rise in the UK’s exports in early 2011 in which total sales of goods overseas rose by 1.3% to £25.1bn in February, the highest since 1980. It is austerity in the UK’s trading partners that will derail that export-led growth, but it is precisely austerity that advocates of internal wage and price deflation propose for Europe and other countries around the world!
The other issue raised by the post is that it seems to pre-suppose the idea that a trade deficit or current account deficit is a sign that a country is “living beyond its means.”
This is simply false. If a country manages to attract a capital account surplus to fund its current account deficit, then it is certainly not living beyond its means. The nation attracted the money needed to pay for imports – the means to pay for current account deficits were available because foreigners bought that country’s financial assets or real assets and the US dollars (or other foreign exchange) to pay for imports flowed in, as foreigners freely gave that money in exchange for ownership of domestic assets. Simple as that. The only time that a country is actually “living beyond its means” is when it has a balance of payments crisis.
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