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As the eurozone continues to slug along, there’s still a radical misconception about the nature of the problems amongst politicians, the general public, and even many economists. The latest maneuver in the Great Eurozone Crisis is an attempt to recapitalize the banks. Admittedly, I could not describe the precise mechanisms to achieve this, as my knowledge in that sphere is not great enough to decipher the tangled web of financial transactions involved. But I don’t need to be able to understand that “tangled web” in explicit detail to know that the eurozone is still missing the point.
As Cullen Roche of Pragmatic Capitalism recently points out, the big eurozone banks are certainly overly leveraged. That’s only part of the problem, however. The bigger problem is that the euro’s structure creates trade distortions within the eurozone. The chart below shows the major eurozone economies by current account as a percentage of GDP.
As you can see, Greece, Italy, Portugal, Spain, and Ireland all have been running significant current account deficits. And the problem is that they cannot correct these deficits. They are essentially stuck as trade deficit nations.
Of course, one might counter that the United States and the United Kingdom are also perpetual trade deficit nations. I’d argue that while this is true, the circumstances significantly differ.
The US and UK both have sovereign currencies, whereas Spain and Greece no longer do. The US and UK likewise benefit from lower prices and interest rates as a result of these trade distortions. While the US and UK’s trade distortions are undesirable, they are not unsustainable.
I’d further argue that these trade imbalances are largely the result of currency distortions across the world, with China and the East Asian nations being the biggest culprits. Ultimately, even if harmful, the US and UK’s sovereign currencies allow them to continue to slog along. It’s the nations on the other end of this distortion that should be worried; namely China.