Financial Times
December 12, 2011
The eurozone deal reached last week won’t work.
Demanding that governments take fiscal responsibilities seriously is all very well but we already know from the UK experience that golden rules tend eventually to turn to base metal. And even if countries were to behave themselves fiscally, there is no guarantee that they would enjoy lasting economic and financial stability. Good fiscal behaviour can still be associated with huge imbalances and massive economic dislocation.
Last year, Germany ran a balance of payments current account surplus of 5.7 per cent of gross domestic product, even bigger than China’s, which stood at 5.2 per cent of GDP. These surpluses need to be recycled somewhere else in the world. A current account surplus, after all, represents no more than an excess of domestic savings over domestic investment. A country running a current account surplus must, by definition, be acquiring foreign assets. Yet, in doing so, it may add to cross-border economic problems.
For the most part, the Chinese have recycled their excess savings into US assets, primarily via their ever-rising foreign exchange reserves. Over the last decade or so, this led to tremendous demand for Treasuries, pushing yields to extraordinarily-low levels. Private investors looked elsewhere for higher returns, leading to a massive rise in demand for mortgage-backed securities that ultimately paved the way to the sub-prime crisis.
The eurozone deal will fail because it offers no explanation of how, precisely, the German current account surplus will be recycled if the southern European nations head down the path of fiscal righteousness.
More
No comments:
Post a Comment