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The Economic Environment:
Teaching Exchange Rates and
Balance of Payments in
the Context of the Eurozone Crisis
Presentation for NZABE Conference
Wintec, Hamilton, 2 October 2012
Keith Rankin [ [email protected] ]
Department of Accounting and Finance
Faculty of Business and Creative Industries
Unitec Institute of Technology
Introduction
• confused Level 5 Economics
– 3 types of economics with different assumptions
all blended into standard introductory courses
a) full-employment neoclassical win-win economics
b) unemployment/recession lose-lose economics
c) mercantilist zero-sum win-lose (lose-win) economics
• we need to be more clear when we shift
assumptions away from (a)
– (b) is discussed in recent context by
•
Paul Krugman (2008,2012), Richard Koo (2009,2011)
– (c) relates to international economics
•
especially when we move away from balanced trade
Mercantilism
• represents business and political practice in
the early (pre-industrial) period of global
capitalism
– 15th to 18th centuries
• reflected in economic thought of the time
– doctrine that nations should aim to achieve a
trade surplus (seen as a 'win') every year
• and should practice deficit-avoidance strategies
– supremacy of production over consumption
• mercantilist strategies in the 1920s
– contributed significantly to the Great Depression
Figure 1: Analysis from Google NGRAM
Teaching International Trade at Level 5
• we start appropriately with balanced trade
and the resulting win-win 'gains from trade'
– imports are clearly presented as benefits, and
exports (what are given up) as costs
– we don't but could address unbalanced trade as
'inter-temporal trade' (Corden)
• this allows students to understand inter-country debt
• debt servicing clearly understood as a net flow of goods
and/or services from debtor to creditor countries
– instead we refer to 'surplus' countries as if that
has the same meaning as 'creditor' countries
• we drift into the 'exports-good imports-bad' idea
Eurozone Crisis: Teaching Balance of Payments
Figure 2
7%
Current Account Balances - Eurozone Countries
Northern Eurozone Countries
Southern Eurozone Countries
5%
percent of GDP
3%
easy interpretation is that North
are winning; South are losing
1%
really, all are losers in a systemic
problem of unbalanced trade
-1%
-3%
-5%
North: Belgium, Austria, Netherland, Germany, Finland, Luxembourg
South: Ireland, Portugal, Italy, Greece, Spain, Cyprus, Malta
-7%
1995
1996
1997
1998
1999
2000
Source: International Monetary Fund World Economic Outlook Database
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Eurozone Crisis: Systemic Approach to Teaching
• exemplar case-study of unbalanced trade
– systemic unbalanced trade zone within a global
economy with chronic fiscal imbalances and with
a perverse floating exchange rate system
• fixed system of exchange rates collapsed
– 1910s, 1930s, 1970s
– Eurozone an extreme form of fixed exchange rates
in which even devaluation is not an option
• northern Eurozone (eg 'BANG') countries
– persistent trade surpluses; undervalued currency
• reverse applies to southern Eurozone 'PIIGS'
Current Account Rebalancing Solutions
• northern and southern Euros ?
– need to imagine creditor countries running
deficits, and debtor countries running surpluses
• is it a matter of northern winners and southern losers?
• austerity ?
– reminiscent of failed 1920s' strategies to achieve
rebalancing deflation in trade-debtor countries
– failed then, in part because creditor countries
would not play their part
• 'deficit' countries could not import more (had to import
less) and 'surplus' countries would not import more
• 'surplus' countries need inflation to balance the
deflation imposed on the debtor countries
Precedent: Australasia in the 19th century
• seven countries with a single currency (£)
– region net debtor; ongoing finance restricted 1890s
– problems of unbalanced trade
• short term resolution through labour market mobility
• doesn't resolve government component of external debt
– longer term solution --- political union
•
•
•
•
formation of Commonwealth of Australia in 1901
New Zealand chose not to participate
reduced problem from extra-national to inter-provincial
federal government activity smoothed imbalances
• Eurozone
– compare and contrast East Germany with Greece
– futile to seek huge wage disparities in EU
Conclusion
• economics should be taught with consistent
assumptions about costs and benefits
– mercantilist assumptions should be rejected
• chronic trade imbalances in the real-world
present great opportunities to teach
– debt as inter-temporal trade
• the requirement for completion of such trade contracts
– contrasting exchange rate mechanisms
• means to correct trade imbalances
• real-world failures of these mechanisms
– the consequences of unresolved imbalances
• use-it or lose-it principle: spend your credits or lose them