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I posted before seeing this other Reader' Comment
People forget to mention that under the euro the deficit problems can only get worse.

Portugal had practically zero net foreign debt and a balanced current account in 1995 - when it started adapting its economy to the single currency. Convergence to the euro with a common monetary policy (meaning easy credit with low interest rates) completely transformed the situation in the following decade. Net Foreign debt is now about 100% of GDP and this is only the accumulated stock. In 2010 this stock has probably increased by some 10 to 12% of GDP, which is the estimated amount for Portugal's current account deficit last year.

The basic accounting identities tell us that a foreign deficit implies either private sector or public sector deficits - or both. It´s amazing yet revealing that the euro zone convergence criteria concentrated on only one variable of this identity (public deficits) while forgetting the other two. Thus a revolutionary process that eliminated monetary sovereignty for the participating states was founded on a misconception of basic accounting concepts!

Most of the Portuguese foreign debt is owed to banks in the core euro zone plus Spain. No wonder then that France and Germany are pressuring Portugal into accepting the intervention of the EFSF. This would mean Portugal would change creditors - not private banks anymore (they would have guaranteed payment of their credits via the EFSF) but a sovereign Euro zone fund instead. The French and German governments would thus be absolved from injecting hundreds of billions of Euros to save their imprudent, lending-happy private banks. For Portugal, however, this solution would be less than attractive: History shows that Sovereign Institutions, contrary to private creditors, typically refuse to accept haircuts.

Portugal is thus rightly resisting the pressure to accept the EFSF "support". She does not want to be pushed into an Ireland-style package that will crush her with an impossible-to-pay debt burden maybe for decades to come - while at the same time tying the country's hands under a fixed exchange rate, no sovereign money regime that implies any adjustments will have to come through a 19th century style deflation.

It's simply unbelievable that Europe has reached this low point of forcing absurd aid-and-austerity packages plus inflexible fiscal and monetary policies on heavily indebted euro zone member states. These recessionary policies can only lead first the periphery countries and ultimately the core euro zone countries themselves into an economic cul-de-sac.

There is no light at the end of the tunnel under the present framework. The European leaders must decide as soon as possible on one of two possible exit scenarios. Either full integration by implementing a single European budget with receipts and expenses at a level of about 30% of the Euro zone's GDP (admitting this is politically feasible)- or else get back to the old system of national currencies that served Europe rather well from 1945 to 1999, at any rate much better than the ill-conceived Euro project.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 08:44:32 AM EST
[ Parent ]
Doesn't seem too hard for Brazilians to understand three sector national accounting. But it seems impossible for the beneficiaries of the imbalances generated by ignoring this form of accounting to understand something that has been at the core of business practice for over half a millennium.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 12th, 2011 at 12:33:18 PM EST
[ Parent ]
You can apparently be a former ECB Chief Economist and work for Goldman Sachs, and profess in public to not understand it
"With the failure to make sovereign states' fiscal policies consistent with the conditions for the single currency area, policymakers not only have weakened the functioning of monetary union, but have also called into question its very survival," Mr Issing declared.
As Upton Sinclair said, it is difficult to get a man to understand something, when his salary depends upon his not understanding it.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 12:45:25 PM EST
[ Parent ]
I did have the Upton Sinclair quote in mind as I composed the comment. :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 12th, 2011 at 08:56:10 PM EST
[ Parent ]

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