Tradutor

segunda-feira, maio 31, 2010

Rebalancing the EuroZone

Any talk of some indebted countries exiting the EURO (just to apply a 30% devaluation?) is pure mirage, the worst kind of illusion.

Would the old currency increase productivity,reduce the diseconomies of scale of small markets,remove the Eastern European and Asian competitors? Would it increase labour productivity, would it make the labour market more flexible and efficient, would it sort out the (in)justice system, would it make easier to pay for pensions and pensioner health costs?

Why not re-introduce intra-EU import tariffs temporarily, that would certainly be less disruptive and more easily reversed. In effect, austerity measures and cutting consumer credit will have the very effect of reducing Club Med demand for German cars, etc.

We can recall from customs union theory that trade diversion and the deteriorating terms of trade for the American south were some of the causes of the US Civil War. The growing pains in customs unions are well documented in history.

A 30% weaker Euro, lower consumption and higher savings in the Club Med countries, sharp reductions in intra-EU trade imbalances and orderly restructuring of existing debt, a proper rebalancing of the EU budget,  and new debt subject to IMF conditions, these are more likely to produce the desired results. Temporary and partial assistance in coping with the permanently higher interest rate differentials will also be necessary.

Creditor and borrower countries are both showing a rermarkable little foresight, prudence and responsability. Hence the acute market volatility, playing with fire.

Exiting the single currency may follow orthodox economic theory but it is not convincing in reality. The market would resist redenominating contracts to the new-old but devaluing, currency, which would become a pariah currency. Just try to get a rental contract, or even a hotel bill, in local currency in Luanda or Buenos Aires. The country would become “euro-ized”, like many dollarized emerging markets.


The pressures to compensate workers and pensioners for the loss of purchasing power would lead to higher inflation and continuing deficits.

The source of the problem is not in the single currency, and the diverging bond yield differentials, butin the single market and in the persistent bilateral trade imbalances.

Tax imports and subsidize exports, if necessary. Reintroduce import tariffs, suspend the customs union until trade flows are rebalanced, but keep the single currency.
____________________________
2-Junho-2010

There are no optimum currency zones, not in the real world.

As there are no free exports.
Trade surplus have to be financed, usually by the exporting country, and paid for eventually by the importing country, IF the imports contribute to local productivity and competitiveness.

Portugal has a large and persistent trade deficit with Germany, €2,6 billion in 2009. Other bilateral trade imbalances in the EuroZone are even larger.

The politicians who created the EURO knew that this was a risk, particularly given the overvalued conversion rates, that’s why they provided for it with Structural and Cohesion Funds.

But the total debt problem turned out to be even greater than expected, due to stimulus provided by the conversion of the interest rates (from 17% to 1,7% in 20 years), and mostly, by the excessive leveraging up of the Club Med countries, given the easy credit globally. Fragmenting the EuroZone would resolve none of these problems. a

PPP Lusofonia

6 comentários:

  1. The creditors are trying to stampede the debtor countries out of the Euro, to avoid shouldering their share of the adjustment cost.
    "Games Creditors Play 101"

    It takes two to get into hock, the easy creditor and foolish borrower.
    PPP Lusofonia

    ResponderEliminar
  2. ppplusofonia | June 2 11:38pm | Permalink
    | Options
    Portugal's external trade deficit with Germany eased to €2.6 billion in 2009. Over a 10-year period, the cumulative bilateral net trade deficit PT-DE of €26 billion, or about 18.4% of Portugal's current Net External Debt of €141 billion.

    Not a bad deal for the German exporters, if it's true that it was financed mostly by French banks.
    Now, the triangular jig may be up.

    Who will finance the net intra-Eurozone exports in the future, the ECB?

    ResponderEliminar
  3. Agora vai ser importante ter um Eximbank, tipo KfW, pois quem quiser exportar vai ter que financiar, não pode depender de um terceiro-financiador.

    ResponderEliminar
  4. G20 points to the need to REBALANCE trade and capital flows:

    ppplusofonia | June 8 11:45am | Permalink
    | Options
    A "multi-speed recovey" is to be expected when REBALANCING trade flows, with surplus countries and deficit countries BOTH having to make adjustments. The real test of the recovery is whether the trade balances are moving in the right direction, towards zero. The "recovery" isn't a recovery, if it increases the imbalances, and the corresponding indebtedness. The net exporters are co-responsible in this, they have to increase imports, it isn't just the US and the peripheral countries that have to decrease imports.

    The international financial "regime change", and the frequently announced end of the old Bretton Woods arrangements, may be here to stay, finally, to reflect the weight of the NEW creditor countries, who have important new responsibilities in REBALANCING the financial system.

    ResponderEliminar
  5. To the extent that the German economic locomotive goes into austerity mode, and the intra-EuroZone trade deficits fail to rebalance, widening rather than narrowing, the structural imbalances remain unsustainable, and the calming of the markets may be only temporary.

    In other words, a credible reversal of the structural trade imbalances is essential, though perhpaps not sufficient, to calm the EuroZone debt and funding markets.

    ResponderEliminar
  6. Saving the EURO and the over-indebted PIGS:

    Asymmetric one-sided rebalancing is a contradiction in economic terms, even if required in political terms. Interesting that “John Maynard Keynes believed that in a fixed exchange-rate system, the burden of adjustment to trade imbalances should fall equally on deficit and surplus countries”. The Marshall Plan grants may have been an important part of the earlier rebalancing.

    With diverging competitiveness among trading partners, export surplus countries have no real choice but to become creditors and finance the net importers. The problem was in foreseen, it was one of the reasons for the creation of the Cohesion Fund, but it has turned out much worse than expected. One reason for the failure may have been the excessive focus on the formal fiscal balance, rather than the trade balance. With Eurostat looking the other way, the “Maastricht criteria” proved easy to evade. Perhaps we need additional “Maastricht criteria” for the Current Account Balance and for the Debt Service/Exports Ratio.

    Creditor adjustment is certainly on the agenda now.

    ResponderEliminar