domingo, novembro 27, 2011

Lessons from past crises ... analytical deficits

It is, unfortunately,too early to do a post mortem on the Eurozone financial crisis while it is still raging, but some misconceptions really need to be resolved.

The recent evaluations of Jean-Claude Trichet's tenure as head of the ECB-European Central Bank,as in the  Economist article of 22-October-2011,  are quite off the mark:  

1. For most of Trichet's term, the Euro was not stable but rather too strong, reaching USD1.60 at times, doing much damage to the weaker Eurozone exporters, who would hardly consider this "impecable".

2. The failure to "perceive the processes that culminated in the current crisis" is a continuing problem, as declining interest rates are seen to have "spurred a great deal of borrowing that fed prodigious construction booms".  Someone needs to ask what spurred the corresponding lending surge, the Basel gnomes?

3.  The Bundesbank, Bank of France and Bank of England, the NCBs, not the ECB, "chose to ignore  the dangers in the credit surge which allowed the build-up of current account imbalances", both the "deficits on the periphery" and the corresponding surplus in the net exporting countries.   The national central banks were, and still are, tasked with prudential regulation, they are the entitities that should  now  be responsible for recapitalization of the overextended banks, but they appear to be missing in action.

4.  If the ECB "believed, wrongly, that countries within a monetary union no longer faced balance of payments constrainsts", it was not alone in this error.  In its Eco Conjuncture of January 2011, the BNP Paribas Economics Research Department wrote:

"Wider current account deficits can be considered normal (sic) in a monetary union which is free from foreign exchange risk. By devloping their comparative strengths, some countries specialise .... It would make no sense to require all members of a monetary union to achieve the same performance in terms of price competitiveness and to have balanced foreign accounts.... Even so, wider external deficits...signal internal imbalances that must be financed by the exterior and that could become unsustainable" 

Perhaps we need a quick refresher course in double entry bookkeeping to recall that
1.  In bilateral intra-Eurozone trade, there can be no  execessive trade deficit without an execessive trade surplus
2.  For every irresponsable overleveraged borrower there is an equal an opposite imprudent overextended lender.  That's why banks require "prudential" regulation, which continues to fail miserably, as even the responsability of bank recapitalization is now being pushed onto the ECB.

When and if the Eurozone crisis is over, in our life time we trust, economic historians will produce many verdicts on the causes and consequences, on the sins of commission and ommission. On balance, they will judge the surplus/creditor countries just as harshly as the deficit/borrowing countries, unless they suffer from their own analytical deficit, as do the articles quoted above.

Mariana Abrantes de Sousa
PPP Lusofonia

Ver também  -   Licões de crises passadas , and
... for every irreponsible borrower there is an equal and opposite irresponsible lender ...