Those who wonder why the Post seems to focus obsessively on budget deficits when there are so many larger problems afflicting the country got part of their answer today in an article on the euro crisis. The article focuses exclusively on budget deficits and the risk of insolvency for the troubled economies of southern Europe. It never once raises the issue of the current account deficits that these countries are experiencing.

The fundamental problem in the euro zone is that costs in southern Europe have risen sharply relative to costs in Germany over the last decade. This makes southern Europe less competitive, leading to its large trade deficit. The trade deficit, implies negative national savings (i.e. there is no possible around this outcome). Negative national savings means either that private investment exceeds private savings (which was true in the bubble years) and/or budget deficits. Unless the trade deficit is reduced in these countries, there is no plausible way to get the budget deficits down.

The current route in to lower deficits is by shrinking the economy and thereby reducing private savings. It is not a plausible long-term strategy. Ultimately it will be necessary for costs in Germany and the south to move closer together. It is very difficult to get prices to fall, which means that Germany has no choice but to experience higher inflation.

But Post readers didn't hear about this issue. They were just told about budget deficits.


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