LEQSPaper57. Governance-fragile-eurozone_s.docx. EURO CRISIS. Excess German Savings, Not Thrift, Caused the European Crisis. One of the reasons that it is been so hard for a lot of analysts, even trained economists, to understand the imbalances that were at the root of the current crisis is that we too easily confuse national savings with household savings. By coincidence there was recently a very interesting debate on the subject involving several economists, and it is pretty clear from the debate that even accounting identities can lead to confusion. The difference between household and national savings matters because of the impact of national savings on a country’s current account, as I discuss in a recent piece in Foreign Policy. In it I argue that we often and mistakenly think of nations as if they were simply very large households.
Because we know that the more a household saves out of current income, the better prepared it is for the future and the more likely to get rich, we assume the same must be true for a country. Or as Mr. Micawber famously insisted: But countries are not households. The Saver’s Dilemma by Michael Pettis. Exit from comment view mode. Click to hide this space BEIJING – Most of the international financial crises that have occurred over the last 200 years were the result of strains created by the recycling of capital from countries with high savings to those with low savings.
The current European crisis is a case in point. For nearly a decade, capital from high-savings countries like Germany flowed to low-savings countries like Spain. The resulting build-up in debt created its own constraints, and now Europe’s economy is forced to rebalance. If the rebalancing takes place only in Spain and other low-savings countries, the result, as John Maynard Keynes warned 80 years ago, must be much higher unemployment.
Whether unemployment remains confined to countries like Spain, or eventually migrates to those like Germany, depends on whether the former remain in the euro. A country’s overall consumption rate is, of course, the flip side of its savings rate. The second factor is income inequality. No, the Spanish Can’t Be More German - By Michael Pettis. Everyone knows the stereotypes. Germans save for the future, while Spaniards spend everything they earn. So it's not surprising that Germany has survived the recent crisis in decent shape, while Spain is a mess, with unemployment at roughly 27 percent. If only the Spaniards had been as thrifty as the Germans, this never would have happened, right? Wrong. The spending patterns of Spanish households did not cause the euro crisis, but were a response to the imbalances created by excess savings in Germany.
National savings and household savings are often assumed to be the same thing, but are actually very different. The national savings rate, on the other hand, includes not just household savings, but also the savings of governments and businesses. National savings, in other words, have very little to do with household preferences and a lot to do with policy. In the 1990s, Germany saved too little. But this changed in the first years of the last decade. Both occurred. But this was not all. The Economics and Politics of the Euro Crisis: A Varieties-of-Capitalism Perspective.
The future of Europe's economy: Disaster or deliverance? Austerity: The History of a Dangerous Idea.