Friday, July 20, 2012

The Misunderstood Crisis In Peripheral Eurozone Countries

The medicine that is being prescribed for the peripheral countries in the eurozone is based upon improving competitiveness in their tradeable sectors.  They are being told to cut labor costs and reduce prices so that they can grow their exports.  It turns out that they had been doing very well in their export markets.  Their current account deficits were not due to falling exports, they were caused by rising imports, supported by a flow of funds from the core countries. Since the major export markets for the peripheral countries are within the eurozone, the best way to improve their economic performance is for the core economies import more from the periphery.  That might require stimulative policies in the core rather than contractionary policies.

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