Monday, December 26, 2011

The tail of the trade - EU imbalances

When you strip away all of the other issues, the financial imbalances is still the problem in the EU and this is a problem of national interest. Germany has to be willing to provide funds and/or take the financial hit for the impact of past lending. 

Let's start with the simple fact that foreign, private and government imbalances all have to sum to zero. Before the crisis, fiscal imbalances were normal, no large differences, but current account imbalances were very significant. The private surpluses of some countries were used to finance the deficits of others. When the surplus countries stopped providing funds, the capital importing countries were left with the problem. They have one of two choices, get competitive and grow, or go into recession and cut the value of assets. Government deficits are used to help with the transition but it may never come. Hence, there is the threat of bankruptcy. The private lenders, banks, will have to provide the transition and this means a decline in their capital from restructuring.

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