Michael Pettis wrote a very good piece yesterday on the current account dilemma. The first section is particularly good (in fact, if you’re an MMTer you probably want to stop reading right there as the rest is not entirely compatible). He states:
“The strength of the German economy in recent years has largely to do with its export success. But for Germany to run a large current account surplus – the consequence I would argue of domestic policies aimed at suppressing consumption and subsidizing production – Spain and the other peripheral countries of Europe had to run large current account deficits. If they didn’t, the euro would have undoubtedly surged, and with it Germany’s export performance would have collapsed. Very low interest rates in the euro area (set largely by Germany) ensured that the peripheral countries would, indeed, run large trade deficits.
The funding by German banks of peripheral European borrowing, in other words, was a necessary part of the deal, arrived at willingly or unwillingly, leading both to Germany’s export success and to the debt problems of the deficit countries. If the latter behaved foolishly, they could not have done so without equally foolish behaviour by Germany, and now both sets of countries – surplus countries and deficit countries – should have do deal jointly with the debt problem.
In that case it is strange for Germans to insist that the peripheral countries have any kind of moral obligation to prevent erosion in the value of that loan portfolio. It is like saying that they have a moral obligation to accept higher unemployment in order that Germany can reduce its own unemployment. Whether or not these countries default of devalue should be wholly a function of their national interest, and not a function of external obligation.”
This is a really excellent explanation of the situation. You can see that these nations are inextricably connected due to their trade policy and the lack of a balancing mechanism via floating exchange rates. So, it’s not reasonable for Germany to tell everyone else in the EMU to shove it (just like it’s not reasonable for China to tell us how much we can devalue our currency). Whether they want to accept it or not – the Europeans are all in this mess together and they have to find a unified solution that resolves this inherent imbalance within the monetary system. This is the primary reason why I think they must move towards some sort of fiscal union.
The great curve ball in this mess could come from the citizens themselves who could decide that a national default is in their best interest (which is not an unreasonable perspective given the fact that their austerity is already putting them in a pretty poor economic position). At the end of the day, as Michael says, default is a function of national interest and not external obligation. If the citizens should capture the power from the hands of the governments and decide that they no longer want to help bailout bankers then the crisis in the EMU will quickly begin to resemble a Lehman 2.0.