quarta-feira, maio 08, 2013

A crisis of (over) confidence

Describing the the Eurozone debt crisis as a "crisis of confidence" gives us few pointers about the underlying causes and eventual solutions.  If anything, the crisis was caused by the over-confidence of   creditors who lent too much, too easily, of borrowers who borrowed more than they could afford to repay, and most of all, of the (im)prudential regulators who let the cross-border intra-Eurozone credit bubble grow until it burst.

And the excessive credit was fed by the trade surpluses of the net exporting countries, and in turn made possible the trade deficits of the net importing countries.  That's why it is surreal to hear one speaker after another talk about the the Eurozone debt crisis with hardly any reference to the balance of payments and the persistent and diverging CAB imbalances .   Why is everyone  so busy ignoring the financial "elephant in the room",  the German record trade surplus?  

The over-confidence turns into a crisis when the market concludes that the intra-Eurozone CAB imbalances are  neither sustainable nor self-correcting because the traditional automatic stabilizers are no longer functioning.  

Unfortunately,  the external CAB imbalances  seem to be taboo. For every mention of a trade deficit or surplus there are dozens of mentions of the budget deficit which is seen under the analytical microscope,  in a collective mis-direction of attention. 

site titleIt's not surprising to hear  specialists such as Mr Kopits,a  member of  of the Conselho de Finanças Públicas, / speak mostly about  fiscal matters.  But this narrow focus on the domestic  side of the problem, when the turnaround must come from the external sector,  hardly boosts our confidence in our ablity to find an eventual positive solution.  It is more encouraging to recall Krugman's early academic work on economic geography and the risks of divergence in a single market among trading partners of very different dimmension.  Perhaps this analysis could help to focus decision makers on what really needs to be done to recover the fragile perifpheral economies of the Euro.

Getting the analysis right, by focusing on the extenal accounts first and foremost, is paramount.  Any doctor will tell you that getting the diagnostic wrong makes very difficult, if not impossible to find the right cure. And we've gotten a lot of the "wrong cure" thus far, with mis-directed and irreponsable austerity  in the creditor countries, limiting their potential contributions to the adjustment in the trade balance.  

A little, or a lot, more attention, to international trade and finance theory, will be essential if we are to avoid the worst scenarios for peace and cohesion in Europe.

Mariana Abrantes de Sousa 
PPP Lusofonia

Conselho de Financças Públicoas
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