I

agree with Rodrik, who, channeling Keynes, notes that these forms of crisis are just as much, if not more, to be blamed on those running large surpluses for sapping demand and causing the deficit country into a balance of payments crisis. The 'technocratic' solution is to follow the recommendations that Rodrik lays out: inflation, boosting domestic demand in Germany, etc., within the EU, to adjust the relative prices in the region to allow for the debtors to grow and inflate their way out of the crisis. However, the fundamental problem is that surplus countries, creditors, always have the upper-hand, as long as the debtors do not seriously consider default. I do not see Germany wiling to give up on its model anytime soon, woefully so, because their model depends on the "co-operation" of other European states. I think the lesson from Argentina was unequivocal: when faced with such a bind of total social collapse, it is better to default and leave the new 'cross of gold', because at then some economic and policy independence is regained and the costs are then placed on those who lent badly, as it should be.

www.perspectivos.blogspot.com

A Win-Win approach to Rebalancing North and South Europe

 Credit markets are demanding that Spain, Portugal and Greece reduce their external borrowing and current account deficits.    Devaluation is not an option for Euro Zone members, so many economists are recommending that Spain, Portugal and Greece help local manufacturers become more competitive by forcing the private sector to cut nominal wage rates.   But despite 20 percent unemployment, Spain’s private sector wages are not falling.   Spanish manufacturing workers are already paid 40 percent less than German workers.   Even cheaper workers are available in Eastern  Europe (where wages are less than half the Spanish level) and in China where wage rates are about one euro per hour after recent strike settlements.   Even if a 10 percent reduction in Spain’s private sector nominal wage rates were politically feasible, can we have any confidence this will fix the problem?  I think not.   

There is a Win-Win strategy that takes advantage of Spain, Greece and Portugal greatest assets—lots of sun, beaches and a significantly warmer climate (particularly during fall, winter and spring).  According to the BBC climate web site, Stockholm, Copenhagen, Edinburgh and Berlin have only 1 or 2 hours of sun a day in November, December and January.   Almeria, Barcelona and Palma Spain and Brindisi Italy, by contrast, have over four hours of sun and day-time temperatures that make outdoor living attractive.    Instead of piling all of their vacation time into one long vacation in the summer, Northern European workers should be encouraged to  schedule more vacation time in the winter. 

 Governments can induce such a shift by offering discounts on airfares and rentals for vacationing in southern Europe in the fall, winter and spring (outside of high season).   School vacations could also be restructured.   

Is the lender/borrower relationship in government accounts characterized by the same incentives to bubble as are financial markets? To me the past few years have made obvious the need for enforced moderation. If policy makers were to focus on moderating growth periods through the buildup of security funds  for corrections, perhaps we could lessen the impact of financial and fiscal volatility. (or even simply the restriction of credit to some degree, after all it is all too obvious that during a boom over-leveraging is inevitable)

Moving forward I like the idea of lenders feeling pain for "excessive lending", but really there is an immense amount of capital flowing through global markets, where should it end up? My core question might be whether there is too much liquidity in the global market? As we saw with the Credit Crisis, investment assets are valued at hundreds or thousands of times the value of goods and governments are pumping more currency into them at prodigious rates. Is it possible that massive expansions in the monetary base could create asset bubbles without inflation in the price of goods? And is this what we've been doing for the past 20 if not 30 years?