Tuesday, June 14, 2011

Reckless lack of discipline?

You expect the IMF, and other conservative institutions and economists, to come up with the same old sound finance stuff. It is more distressing when Dr. Doom (as Nouriel Roubini is known among his friends) says, on an otherwise reasonable column  (subscription required) about the likely break up of the eurozone, that interest rate convergence led to "a reckless lack of discipline in countries such as Greece and Portugal." The point is that at least in these two countries the problem was fiscal, and not the euro, the lack of competitiveness and speculative bubbles.

The graph above shows the primary balance in Germany and the three little PIGs that were forced into ECB/IMF adjustment programs (yep, the big bad wolf in this story). Primary balances show the difference between spending and revenue, excluding interest payments. Note that Ireland had surpluses until the crisis, and Greece and Portugal are not substantially different than Germany until the crisis. And the worst deficits after the crisis take place in Ireland, the most well behaved according to sound finance. Can we check the data before we write about the crisis?!

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