We have been focusing on the deficit problem and have argued that this sovereign crisis is different because there is not an independent currency. There cannot be a devaluation like we usually see, although we are seeing capital flight out of the euro. Nevertheless, a look a the current account for each of the PIIGS shows significant deficits.
The message is clear investments is outstripping savings. There will have to be a cutback in the domestic spending to return to an equilibrium level that is sustainable. The terms of trade cannot change on a country specific basis in the EU except if there is a change in productivity. A significant portion of these current account deficits is with other EU countries which means that the debt problem is intertwined with the rest of the EU. Unfortunately, the prescription for solving the problem follows the classic austerity programs usually recommended by the IMF during a credit crisis.
The message is clear investments is outstripping savings. There will have to be a cutback in the domestic spending to return to an equilibrium level that is sustainable. The terms of trade cannot change on a country specific basis in the EU except if there is a change in productivity. A significant portion of these current account deficits is with other EU countries which means that the debt problem is intertwined with the rest of the EU. Unfortunately, the prescription for solving the problem follows the classic austerity programs usually recommended by the IMF during a credit crisis.
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