key difference between mercantilists and free traders is one of outlook. Free
traders see consumption as the goal of the economy. Mercantilists believe it is
intuition tells us that power should be in the hands of the producers. The free
traders should be the supplicants, desperate for specialty steel and consumer
electronics, desperate for loans so they can live beyond their means. But
surprisingly, control of the relationship, even if they don’t realise it, lies
with the consuming nations”.
the producers need the consumers more than the other way around”.
the euro dissolve into its constituent parts, the southern periphery will
immediately become much more competitive in world markets.The revived D Mark, no longer held down by
Spanish weakness, would appreciate dramatically, bad news for Germany’s
manufacturing export sector”.
natural intuition is that the creditor has the whip hand but that assumption
may well be out of date.These days,
China needs America, Germany needs Spain, more than the other way around.Don’t fear the mercantilists”.
of this sounds quite plausible and reminds me of what I have written on other
occasions: should the Eurozone collapse, the relatively happier people will be
in the periphery because they are not worse off than they already are and with
a cheap local currency (and quite a bit of hard currency cash stashed away at
foreign banks), they have better prospects for the future. The core, on the
other hand, will lose jobs and will have to write-off gigantic sums of loans to
view, however, leaves out a very important element in the equasion of
cross-border capital flows because it only focuses on the trade account and not
at all on the current account. It is the current account (and not the trade account)
which eventually drives cross-border capital flows.
an island in the South Sea which produces next to nothing. The people there
live on the agricultural products which they produce and little else. They
cannot import products because they have no foreign currency for it. Thus, their living standard is very low. Then
tourism starts and brings tons of foreign currency which allows the islanders
to import every product that they could possibly desire. So, you have an
economy with an enormous trade deficit and yet, it doesn’t have to import
capital because it gets the foreign currency which it needs out of operations
(tourism revenue is part of the current account). The living standard, formerly
extremely low, explodes without the islanders having to borrow money.
simple terms, the current account consists of the trade balance
(manufacturings) and the services balance (i. e. tourism, shipping). If the
services balances makes up for what is ‘lost’ in the trade balance, the economy
does not need to borrow abroad.
relative importance of the trade versus the services balance is one of domestic
employment. It could be that the services surplus does not generate as much
employment as is lost through the trade deficit.
there are about 80 million Germans generating horrendous current account
surpluses. Just picture that half of those Germans were to spend their
vacations in the periphery and spend about 10.000 Euro per head. The horrendous
current account surplus would be wiped out overnight; Germans would have a lot
of fun as tourists in the periphery; and the periphery would not have to borrow
abroad while still having substantial trade deficits. They could maintain their
is my point? The process of recycling trade surpluses to trade deficit
countries does not necessarily have to come by way of cross-border capital
flows. It can also come through the services balance and when those services
are tourism, both the paying and the receiving side have a lot of fun.