Imbalances within a monetary union: How to correct them? How to prevent them?

Readers may be interested in the papers presented at the XXIV Symposium Moneda y Crédito in Madrid: the list is here, including my joint contribution with Barbara Pels on “Current Account Balances in Europe“.

4 replies on “Imbalances within a monetary union: How to correct them? How to prevent them?”

“A troubling pattern was greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capacity”
Otherwise known as self-fulfilling foolishness! The less you save, the more you construct, the greater the optimism, the bigger the bust when it comes.

It is unfortunate and, perhaps, significant that analysis of this quality on these important issues attracts hardly any comment or attention. It must also be very disappointing because I suspect one of the original motivations for this blog was to bring analysis of this quality to a wider audience.

Bearing in mind Keynes’s unachieved intent to ensure that the post-war economic order would treat excessive current account surpluses as damaging as excessive deficits, I have wondered to what extent the EU’s (and the EZ’s) internal imbalances are a symptom or part of the malaise. And I have also wondered, given the extent of cross internal border ownership of both financial and non-financial firms, about the impact of this on national current account balances. Should some adjustment be made as the single market has progressed? Do these imbalances matter to the same extent that they once might have?

However, despite this, I very much agree with your pithy summing up of a key problem which Hogan has highlighted above. The EU is confronting demand for huge infrastructure investment – largely because of the previous imbalance in investment priorities you have highlighted. In the energy area this demand is being increased by the bolting on of the climate change agenda. Both the EU and many member-state governments are coming to the conclusion that the dysfunctional market and regulatory arrangements they have developed are not up to the task of securing efficient low-cost financing of this investment and they are responding with EU and state level public interventions – and energy firms are raising prices to extract up-front, part-financing of investment from final consumers. This will create a paradise for subsidy grabbers, special interest lobbyists, rent-seekers, regulator capturers and consumer gougers.

The irony is that the willingness and commitment of final energy consumers to pay for the essential services they require (but at affordable prices) remains unchanged. But the dysfunctional market and regulatory arrangements have destroyed the ability to convert this commitment into the long-term contracts that providers of finance for investment in long-lived, specific assets require. The capital markets have ‘good money’ to invest in this asset class, but, because there is no proper assurance of investment recovery, they are reluctant to provide finance -and if they do only at a high cost of capital.

This is an under-appreciated aspect of EU policy that is hindering the productive investment to boost economic activity and future economic performance. It really needs some sustained attention in the vague hope of shifting the policy focus.

@ Paul Hunt, etc

“It is unfortunate and, perhaps, significant that analysis of this quality on these important issues attracts hardly any comment or attention.”

I probably post too much, but I also do read things and not comment: which I assume is true for others too. Perhaps the blog needs a ‘like’ button.

One is constantly impressed by the speed with which Philip Lane is moving – producing quality work that addresses problems before they fully surface in the public sphere.

One passage did jump out.

“The scale of the adjustment would be even more severe without substantial official capital inflows in a number of countries, whether through EU/IMF programmes or, for euro area member countries, courtesy of the liquidity policies of the ECB (Lane and Milesi-Ferretti 2011b)”

The attitude of gratitude and patronage vis a vis the ECB should end. The actions of the ECB have shredded confidence in the EZ sovereign and bank markets. Yes, bank liquidity has been provided, but the ECB’s political blackmail that goes with it (and which applies to all EZ countries) as is increasingly surfacing has forced disastrous economic policies, making the situation far worse and which are then waved away as, ‘oh look we were a bit over-optimistic there: bad luck’.

The ECB bet the farm on expansionary contraction in the periphery and lost – though curiously the periphery is doing the paying.


Indeed. I also comment too much, but some of the nonsense being purveyed discourages silence.

I have commented elsewhere:
on the political, legal and institutional constraints that affect the ECB. So I would be less judgemental, perhaps, than you are.

However, I, too, am impressed by the work Philip has done, and is doing, with international colleagues to inform and enhance the policy debate at the EU level.

The problem is that most national parliaments do not have the powers, procedures or resources to bring to bear to kind of policy scrutiny and the systematic assessment of options that Philip and his colleagues could inform and guide. Unfortunately, the entire academic, research body or think-tank effort seems to rely on the hope of attracting the attention of policy-makers, government advisors, or senior public officials, who operate largely behind the scenes.

A huge amount of effort seems to be applied without any clear, effective or transparent channel of communication. I simply can’t understand why economists who work in the areas dealing with public policy, collectively, and both at the national and EU level, are not campaigning to secure these channels of communication with both governments and parliaments.

It may simply be that those who perceive themselves to be reasonably well-placed are reluctant to provide the opportunity to others who may be less well-placed but who might steal their thunder. As Henry Kissinger once observed, the politics in academia are so vicious because the prizes are so small.

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