Thursday, December 15, 2011

Trade Imbalances

Kevin Drum observes that the real problem between the Euro rich and their poor southern relatives is trade imbalance and capital flows. Germany has been making more stuff than it consumes and Greece has been doing the opposite.

....But rebalancing trade flows? I'm not sure anyone even knows how to do that. The normal mechanism is via currency devaluations, but within the eurozone that's obviously not a possibility.

This is Europe's biggest problem. The ECB could put out the short-term fire if it agreed to guarantee periphery debt. That's a political nonstarter right now, but at least everyone knows it's an option if things really start to implode next year. But trade and capital flow balancing? Nobody even has a clue what to do about that. But without it, future crises and future bailouts are inevitable.

It's not quite true that nobody knows how to rebalance without currency revaluations - consider for example, New York and Mississipi. How does the US rebalance between the more productive and the less? A combination of at least three things: labor mobility, transfer payments, and governments that can't get away with unlimited borrowing.

The Euro deal seeks to fix only the last of these. Transfer payments seem off the table, and labor mobility is limited more by language and cultural barriers than policy.