Christian Science Monitor
May 25, 2012
For years, we have heard Paul Krugman and others assert that Greece etc. can't reduce their current account deficit unless Germany etc. reduces its surpluses. While that would have been true if the world had consisted only of the euro area nations, it is clearly not true in the world we actually live in. Krugman himself lives in a country with an economy bigger than that of the euro area and Japan and China have together a bigger economy than the euro area plus there are nearly 180 more countries including for example Brazil, Saudi Arabia, Turkey, India, Russia, Canada, Australia, Britain, Switzerland, Norway and Sweden, outside of the euro area.
With so many and in some cases so big economies outside of the euro area, and with the euro area trading so much with them it is clearly possible for the aggregate euro area to strengthen its balance, or in other words it is possible for Greece etc. to reduce their deficits without a reduction of the surpluses of Germany etc.. something that is in fact happening as during the last 4 months alone the euro area current account balance has swinged from a €17 billion deficit to a €10 billion surplus.
This shift reflects in part the effects of the euro area austerity measures, and in part it reflects the euro's weak exchange rate. Krugman now seems to implicitly acknowledge that he was wrong when he asserted that the euro area's aggregate balance can't change, because now he argues that it would be wrong if it happened.
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