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sexta-feira, julho 17, 2015

In the Eurozone crisis, it's the trade imbalances stupid

International trade and finance theory seems to have been one of the major sacrifice of the Eurozone crisis, together with the future prosperity of the citizens in the small, peripheral net importing countries.

Now, a Danish economist reminds us of the principles of International Economics 201 with an article entitled, "Greece versus  Turkey:  It's the exchange rate regime, stupid".

Coming from Denmark,  the smart little country that  voted to stay out of the Euro, this deserves a good rereading by all those lawyers maskerating as finance officials. The threat of devaluation raises financing costs for an economy over the short term, a small price to pay to avoid financial disaster affecting several generations.

The persistent mantra of "exiting the bailout conditions and returning to the financial markets" which we hear from the politicians and the financial media in Portugal doesn't even begin to touch on the underlying causes and consequences of the persistent balance of payments crises.

Mariana Abrantes de Sousa 
PPP Lusofonia 
Greece versus Turkey: It’s the exchange rate exchange rate regime stupid!
A history of political dysfunctionality, corruption, military coups, military conflict with a neighboring country, large current deficits and weak fiscal management.
Greece fits that description perfectly well, but so does Turkey. So why don’t we have a major crisis in Turkey and why is Turkey not on the brink of default when neighboring Greece is?
The answer is simple – It’s the exchange rate exchange rate regime stupid!
In 2001 Turkey was forced by a major crisis to abandon it’s managed/crawling peg regime and instead introduced a floating exchange rate regime and the Turkish central bank introduced an inflation targeting regime.
14 years later Turkey is still in many ways politically dysfunctional – in fact it has gotten worse in recent years – there has been rumours of plans of military coups, there has been major corruption scandals even involving the Prime Minister (now president Erdogan) and the governing AKParty and lately the civil war in Syria has created a massive inflow of refugees and increased tensions with Turkish Kurdish population.
All this has to a large extent been reflected in the value of the Turkish lira, which have been highly volatile since 2001 – and increasingly so since 2008, but the floating exchange rate regime means that we have not seen the same kind of volatility in the domestic Turkish economy, which was so common prior to 2001.
While Turkey in 2001 floated the lira Greece gave up having a monetary policy of its own and instead joined the euro. We know the story – while the first years of euro membership in general was deemed succesfull that hardly has been the case since 2008: The economy has collapsed, unemployment increased dramatically, debt has skyrocketed, we effectively have had sovereign default and we are on the brink of an euro exit.
Milton Friedman used to say “never underestimate the importance of luck of nations” referring to how pegged exchange regimes might be succesfull for a while, but also that it could have catastrophic consequence to maintain a pegged exchange rate regime.
In 2008 Greece ran out of luck because it made the fatal decision to join the euro in 2001. Today is it blatantly obvious that Greece should have done as Turkey and floated the drachma. It now seems like after 14 years Greece will be forced by a major crisis to do exactly that.
Lars Christensen
Greece Turkey GDPcapUSD