Financial Times
November 3, 2011
There is an old English saying that all work and no play makes Jack a dull boy. Whether that is true or not, it is pretty clear that all finance and no adjustment makes for a dull international economy.
Let me explain. Nearly all the action and discussion on problem countries and areas take the form of financing packages. And if such a package runs into difficulties another refinancing package is dreamed up. Moreover, nearly all the unofficial comment is on the same lines, with ever more ingenious insurance and leverage introduced. For those who like this sort of thing, this is the sort of thing they like. Meanwhile, those of us who were brought up think of international economics in terms of costs, prices and exchange rates are made to feel like dinosaurs.
What is missing from the discussion is the role of adjustment. By adjustment, I mean correcting what is fundamentally wrong in a country’s international position. If a country is not paying its way internationally, it needs to sell more and/or buy less from its trading partners – or to attract more long-term physical investment from them For a country in the happy position of being outside a misconceived arrangement such as the eurozone, adjustment might be helped by devaluation. Exchange rate changes often need to be backed by domestic retrenchment. But to rely on that alone is a form of sadomasochism.
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