In yesterday's Financial Times, Martin Wolf said:
"Why would a currency union lead to a credit crisis? One answer is that divergences in relative costs lead to structural trade imbalances - large external deficits when the less competitive economies are close to potential output. The private or public sectors must then spend more than their incomes to sustain full employment. Such excess spending must, in turn, be financed from abroad. In the end, such lending will vanish"
I'm failing to grasp the logic here, particularly how a currency union leads to structural trade imbalances and why less competitive economies would be close to potential output. I would be very grateful if anyone could explain this.
How does a currency union lead to a credit crisis? Watch
- Thread Starter
- 02-12-2010 13:45
- 05-12-2010 00:48
It does not by definition. Being in a currency union means that the you all use the same currency. This means that weak economies that are not competitive cannot depreciate their currency to allow for export lead growth (what would natural happen if allowed to float).