Capital
flows from the core to the periphery induced by low interest rates, low
inflationary expectations, a misconception of a globalised & perpetually
growing world economy, all unquestionably contributed to the worsening of the
trade imbalances in the periphery. What the euro achieved was to significantly worsen
the trade imbalances which periphery countries were already experiencing. The
chart below is a case in point for Spain. The same would apply for the rest of
the GIPSIIS.
On the
devaluation front if wages were the instrumental factor affecting trade imbalances
I would agree but it is a lot more than this. Each country has its own
comparative advantages and it must thus allocate resources to highlight these advantaged
sectors. This way it creates import substitution and also advances its export
sector. In countries such as Greece were the inefficient and corrupt government
sector still controls a large share of GDP, efforts should be directed at privatising
as a source of efficiency, as a way to reduce debt as well as an injection of much needed scarce
capital. Finally a protagonist role must also be played by the surplus
countries whose economies benefited the most by the euro. They must increase
local consumption through government and or private initiative so as to absorb
increased imports from the periphery and contribute to rebalancing. The
consequential loss of domestic sales can be made up by the fruits of their new investments
in the productive process in the periphery. Even more to their liking if their
investments are centred in export oriented industries they will do what they
have been doing so successfully at home knowing that their effort stabilises
their existence.
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