There are better ways forward for the EU

by Ricardo Cabral

Vox
October 20, 2011

The EU is presently a source of great instability that leaders have yet to tackle. This column argues the current policy response is misguided. The adjustment programmes are bound to fail to achieve sustainable budget deficits, and may result in an unprecedented destruction of economic activity. Rather, the EU policy response should explicitly target improvements to trade and income balances, and address high external debt through debt restructuring.

The EU, the world’s largest economy, is presently a source of great instability to itself and to the world economy. The policy framework put in place through the EU/IMF adjustment programmes is, in my view, inconsistent and dangerous.

Diagnosis: Nature of the crisis

Europe’s sovereign debt crisis is really a balance-of-payments and external debt crisis (Sinn 2011, Cabral 2011). While the EU as a whole does not have external imbalances to speak of, the external imbalances of numerous individual member countries have reached levels which are unprecedented in previous balance-of-payments and external debt crises. In fact, Table 1 and Figures 1 and 2 suggest that potentially 12 member countries may have excessive net external liabilities.

Table 1. Net external debt/ liabilities for 12 peripheral countries seem higher than levels considered sustainable (of up to about 40% of GDP)

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