There has been a lot of discussion recently about the alleged undemocratic character of the austerity programs and bailout agreements for peripheral eurozone Member States. This is not the fundamental problem of the eurozone. Trade imbalances are not resolved, and this will render all rescue efforts futile.
I have followed with great interest the discussion among EU bloggers on the implications of the austerity programs for the level of democracy in peripheral eurozone Member States (see in particular the contributions by Leigh Phillips, Ron Patz, and John Worth). They all raise important questions and are definitely worth reading. What they miss, however, is the true cause of the eurozone crisis and the implications it has for any future efforts to rescue the euro.
The real problem is the trade imbalances of eurozone Member States. One group of Northern countries enjoys significant trade surpluses, while the Southern countries have deteriorating trade deficits. This process of economic divergence has worsened with the introduction of the euro (see the figure below).
Eurozone Current Account Balances as % GDP (source: Political Economy 101)
This has led to all kinds of negative outcomes for Southern economies, including excessive sovereign debt levels. But the current approach to resolving the eurozone crisis has been one-sided. We only try to repair one side of the equation – that is, the excessive spending in peripheral eurozone Member States. We do not take any measures to address the excessive saving in Northern countries like Germany or Netherlands. In addition to this we do not allow Southern countries to devalue their currencies in order to become competitive again.
This approach will not work. The treatment of excessive saving as a “virtue” will only worsen the current divergences. The lack of a devaluation option for Southern countries will bring them literally to the wall.
In this narrative the method for devising unsuccessful measures is of secondary importance.
Voluntary debt rollovers will not do the trick, nor will austerity programs. Bolder and much more balanced action is needed if we really want to repair the damage. If Northern countries continue to overlook their contribution to the crisis, the eurozone will fall under its own weight.
Since I am not an economist I thought it would be useful to list some the sources for this post: