Wednesday, May 22, 2013

Excess German savings, not thrift, caused the European crisis

Michael Pettis explains this so thoroughly and clearly that even members of the Merkel government should be able to understand why their policies are the problem - not those of Spain, Portugal or Italy. Here is Pettis's conclusion, but I encourage you to read the whole long blog post, especially if you don't yet agree entirely with the following:

Excess German savings, not thrift, caused the European crisis: "As long as it is part of the euro Spain has no choice but to respond to changes in German savings rates. There is nothing mysterious about this process. It is simply the way the balance of payments works, and thrift has nothing to do with it. If Germany does not take steps to force down its savings rate by increasing the household share of GDP, then either all of Europe becomes like Germany, in which case growth slows to a crawl and some other country – maybe the US? – will be forced to resolve Europe’s demand deficiency either through higher unemployment or through higher debt, or Europe must break apart to free Spain and the other peripheral countries from German savings imbalances.

I don’t imagine the rest of the world can absorb demand deficiency from a Germanic Europe, and if Europe tries to force it the result will almost certainly be an eventual collapse in trade relations, so either Germany rebalances or Europe breaks apart. It is hard for me to see many other options."