May 03, 2013
Robert Samuelson actually has a useful column today pointing out the imbalances that underlie the problems in the euro zone. The basic point is that the bubbles of the last decade led to a situation where prices in the crisis countries are hugely out of line with prices in the core countries, most importantly Germany. This means either substantial deflation in the crisis countries, considerably more rapid inflation in Germany and other core countries, or someone leaves the euro.
Samuelson rightly notes that none of these solutions seem likely right now for either economic or political reasons, or both. This means that the crisis is likely to persist for some time into the future.
However there is another part of the story that really deserves mentioning. What on earth were the folks at the European Central Bank (ECB) thinking in the years leading up to the crisis? The misalignment of prices in these countries did not arise overnight. There was considerably more rapid inflation in the current group of crisis countries in the last decade leading to enormous trade imbalances. Here’s the data from the IMF showing the deficits as a share of GDP.
Current Account Balance as a Percent of GDP
| Country | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|
| Greece | -6.533 | -5.785 | -7.637 | -11.388 | -14.609 | -14.922 |
| Portugal | -6.433 | -8.327 | -10.323 | -10.685 | -10.102 | -12.638 |
| Spain | -3.508 | -5.248 | -7.353 | -8.961 | -9.995 | -9.623 |
Source: International Monetary Fund.
These are incredible imbalances. In 2005, when the top people at the ECB went to the annual Fed meeting at Jackson Hole to celebrate the “Great Moderation” and debate whether Alan Greenspan was the greatest central banker of all time, the current account deficits in both Spain and Greece were already more than 7 percent of GDP. This would be a deficit of more than $1.1 trillion in the current U.S. economy. The deficit of 10.3 percent of GDP in Portugal would be almost $1.7 trillion in today’s economy. These deficits continued to expand, with Greece’s peaking at almost 15 percent of GDP ($2.4 trillion in the U.S. economy) in 2008.
How did the ECB think these imbalances made sense? There was some room for these countries to catch up relative to the core countries, but none of them was a China or India that could plausibly envision double-digit or near double-digit growth for decades. It’s hard to envision what story these people could have told themselves that did not have “disaster” in it. But, they did nothing and these economies collapsed.
The people in the crisis countries are now suffering enormously with no end in sight; and the boys and girls at the ECB? They still have their high paying jobs and plush pensions. See, the modern economy does offer good-paying jobs for people without skills.
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