My comments on Krugman's post http://krugman.blogs.nytimes.com/2012/10/01/euro-counterfactuals-wonkish/?smid=tw-NytimesKrugman&seid=auto#comments

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.
Historical Data Chart


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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