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Home Publications Blogs Beat the Press The New York Times Sees the Solution to Euro Zone Imbalances as a Problem

The New York Times Sees the Solution to Euro Zone Imbalances as a Problem

Wednesday, 04 September 2013 04:24

The countries of southern Europe (Spain, Italy, Portugal, and Greece) have enormous trade imbalances with the countries of northern Europe, most importantly Germany. This is the core problem facing the euro zone economies. In order to limit the size of these imbalances, the European Central Bank (ECB) and the European Commission (EC) are demanding that the southern countries sharply reduce their budget deficits. This has thrown these countries into severe recessions with double-digit unemployment. (Yes, the immediate issue is the budget deficit, but this is an outgrowth of the trade deficit.)

Using complex economics, it is possible to determine that in order to reduce the southern country trade deficits, it will be necessary for northern countries to see more rapid inflation, thereby raising the price of their output relative to the price of output in southern Europe. However the New York Times see this prospect as a serious problem. A story discussing Germany's relative prosperity told readers:

"But a closer look at the [growth] numbers shows a big gulf between growing, northern-tier countries like Germany, Austria or Finland and southern countries like Spain, Italy and Greece, which continue to contract, albeit at a more moderate pace than before. The divide makes for tricky navigation by the European Central Bank, which will hold its monthly monetary policy meeting on Thursday, as it tries to promote growth in the ailing countries while heading off inflation in the healthier ones."

Of course if the purpose is to address the imbalances in the euro zone then the ECB should be promoting more inflation in northern Europe rather than trying to head it off.

This piece also uses the pejorative term "handout" to describe assistance from Germany and other northern European countries to the crisis countries. This money is allowing the southern countries to maintain payments to German banks and also to maintain their ability to purchase German exports. If Germany and other northern European countries provided less support for the southern countries it is more likely that they would opt to leave the euro zone and default on many of their debts. This would both cost Germany much wealth and lead to a sharp reduction in its exports.

It is also worth noting that Germany's growth has not been quite as impressive as this article implies. Since the beginning of the downturn in 2007 its growth has been virtually identical to growth in the United States. While it does have lower labor force growth, and therefore lower potential growth, the main difference in outcomes has been due to the fact that Germany encourages employers to keep workers on the payroll in a downturn, even at shorter hours, rather than laying them off. In other words, labor market policy rather than growth explains Germany's relative prosperity.

Comments (5)Add Comment
Economics Isn't The Times Strong Point
written by Charley James, September 04, 2013 5:26
Other than Paul Krugman's column and blog, and sometimes (but not always) the Economix feature, it's impossible to find any reporters or writers at The Times who actually understand economics.

It doesn't matter if the reporter works on the news side or the business page side, the lack of understanding of basic economic concepts is disheartening. This is why when Jack Ewing (who wrote the piece you link to) hears the word "inflation," he thinks it's a feared bugaboo rather than grasping that a bit more inflation is precisely what Europe, England and America needs right now - or, as Dr. Krugman puts it, at least the expectation that central banks will encourage a higher inflation rate.

Sadly, The New York Times is the best of the worst. For people in the hinterland who don't have access (or the time) to read The Times, they are even more misinformed that the Times staff of reporters.
Economics is an nyt strength, but often misinforms
written by JaaaaayCeeeee, September 04, 2013 7:04
Can't agree that it's ignorance, when it's so consistent. David Leonhardt and Eduardo Porter, for example, know exactly how the pick facts, and the business and news section articles on economics often comfort the comfortable and afflict the afflict, at the expense of the long term economy, even undermining or contradicting whatever Krugman writes sometimes.
Dean Baker's Sin
written by simjam, September 04, 2013 8:11
The comments above are on target. Why is Dean Baker virtually screened out of the mainstream (corporate) media? He is relegated to this small echo chamber populated by kindred souls. The reason he is ignored, of course, is that truth tellers aren't allowed on the stage. Only puppets need apply
written by skeptonomist, September 04, 2013 8:23
The policy of the ECB is of course to promote deflation in the peripheral countries rather than inflation in Germany.
written by Matt McOsker, September 04, 2013 8:24
No, inflation is not the answer. The southern countries need to run larger public deficits to offset trade imbalances and all the other imbalances they face. Of course, that is difficult since they are no longer fiat.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.