(...) The conventional wisdom also declares that once fiscal adjustments have been made and flexibility introduced, the affected economies can return to growth, as Germany did after painful adjustments in the early noughties. Furthermore, adds the conventional wisdom, the existence of huge current account imbalances within the zone has no bearing on either the problem or the solution. There is no more reason to worry about eurozone internal “imbalances” than one would about imbalances between US states.
This conventional wisdom is, alas, nonsense. Until policymakers recognise this, they are dooming the eurozone to huge tensions. There is no way to put this delicately. So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output. (...)
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