Sunday, July 26, 2009

The trade tensions in Europe should rise




It does not seem like the there is a current account problem in Europe when you look at the EU in total. The current account is close to zero, but if you drill down there are significant divergences across countries. This is a potential friction that will not go away. There are a number of countries which have large current account deficits and they do not have any control over monetary policy; consequently, there is little that can be done to close the deficit. Devaluation is not possible except for the EU as a whole. They cannot control trade policy and there are restrictions on the budget deficits that can be created. If there is no global recovery, these current account deficits may only get worse if other countries will compete through competitive devaluations.

What EU countries do to better there competitive situation will be one of the more interesting policy situations facing advanced economies.

No comments: