Monday, April 8, 2013

Some household name economists don’t get the basic EZ problem.

Euro periphery countries are in debt and are having to pay elevated rates to borrow. Why? It’s because their outgoings have exceeded their income for some years, that is, they have a balance payments problem, as this Deutsch Bank paper explains.

And for another explanation, see this by Brian Ashcroft (former economics prof. at Strathclyde Business School).
And the solution to a balance of payments deficit if you have your own currency is to devalue. But EZ countries can’t devalue. So they have to cut costs, and that is currently achieved in the EZ in a slow painful way: deflation in periphery countries.
Unfortunately a number of economists don’t seem to get it, e.g. Paul Krugman and Warren Mosler.They seem to think periphery problems can be solved simply by having the ECB buy periphery debt, which of course takes away the pain of deflation, but it simply extends the time taken to cure the basic problem (or prevents the cure ever being achieved).

Paul Krugman (who rarely puts a step wrong) suggests here that the fact that the ECB looks like it is going to support France come what may means that France can escape austerity.

Wrong. The ECB can support France for a few more years yet. But if France doesn’t cut its costs relative to Germany, France’s debts will simply pile up further and further.  The day of reckoning will come.


P.S. (12th April 2013).   Here are two more economists who don’t get the distinction between monetarily sovereign countries and the EZ, or who are at the very least extremely vague on the distinction. First Mark Blyth. He certainly doesn’t make the distinction clear in the first 3 minutes of this video. So I’m not tempted to watch any more.

Second, there is this article by William Black. However his is a bit clearer on the distinction in the conclusion of an earlier article.

P.S. (16th April 2013).   Another example – published by “Prime Policy Research in Macroeconomics”. Also, Krugman in a later article DOES STRESS the importance of the relatively competitiveness of different EZ countries.

P.S. (23rd April 2013). Another example of someone who doesn't "get it". And (a refreshing change) someone who does.


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