Posts Tagged EU

Europe’s new credit crunch

Posted by George Irvin in EU on October 7, 2011

As the Euro Area (EA) dithers about bailing out Greece in the short term and continues to argue about how to expand the European Financial Stability Facility (EFSF), the sovereign debt crisis is turning into a full-blown banking crisis. Shares in Dexia, the Franco-Belgian banking group, are down 72% on their 52-week high—closely followed by other pillars of western finance such as Bank of America (-66%),  RBS (-57%) and Deutsche Bank (-50%). [1]  In effect, financial markets have seen the wiring on the wall and have been pulling out of bank shares—both banks that hold euro sovereign debt assets and those that hold shares in other banks that do. This means that the asset side of banks’ balance sheets are contracting and that insolvency looms.

True, the gloom lightened briefly when both Angela Merkel and EU President J-M Barroso announced they favoured a pan-European recapitalisation programme—causing EU bank shares to rally for a time. Governments are trying to pour cash into the banks—in the UK, Mervin King has announced an extra £75bn of quantitative easing (QE), allegedly to help industry get more and cheaper credit, but in reality to ward off a new credit crunch along the lines of what happened after Lehman’s collapsed in 2008. In his words, we face the ‘worst financial crisis ever’.

However, the recapitalisation of Europe’s banks faces a serious credibility gap. First, Dexia was one of the banks to pass the European Banking Authority’s (EBA) ‘stress tests’ with flying colours. Secondly, one result of these tests was a serious underestimation of the degree of recapitalisation required.  In consequence, a new round of tests will be required adding further to delays. Perhaps more importantly, there is growing pressure from investors to make banks ‘mark to market’; ie, report the current market value of their assets. Adoption of such a rule combined with current market volatility would doubtless lead to a large number of banks failing the stress tests.

And of course, the prospect of a Greek default looms larger by the day. The problem is not so much that a Greek default is unaffordable; doubtless, were the country to default on its own, it would take some banks down—starting with its own banks. The real danger is that of contagion. We know that Spain and Italy are ‘too big to fail’, and the markets have already begun to mark down commercial banks with exposure to them, not just in Spain and Italy but in France and even the UK. Whatever one may think about financial markets, their analysts are not fools; what they are telling us is that a Greek default will trigger widespread contagion.

Meanwhile, EA Parliaments dither about just how the EFSF’s limited capital can be stretched to meet the bill. Since the €440bn available cannot be miraculously turned into the €2tn required for ‘shock and awe’ to be sure of succeeding, the latest twist involves turning the EFSF from a lending institution into a insurance company, in effect selling credit default swaps (CDSs) to those most in need of insurance. These would be structured into equity, mezzanine and senior layers just like their Wall Street cousins, thus enabling €440bn to be hugely leveraged.

But as more than one commentator has pointed out, there are several problems here. First, one is using over-leveraged instruments to deal with the problem of over-leverage. Second, there is no ‘lender of the last resort’—if the scheme goes wrong, governments cannot bailout the losers since it is governments who hold the equity tranches. In principle, the ECB could perform this role—but the Germans are resolute in their opposition to the ECB acting as a Central Bank for governments. [2]  For that matter, tiny Slovakia is threatening to upset the EFSF applecart unless collateral is provided for its pledged assistance.

An obvious way out of this nightmare would be to forgive Greece at least half its debt (which the markets believe is in any case unpayable) while further reducing the interest on its loan, lengthening its debt maturity profile and aiding the country to become more competitive. Cynics might say this has been obvious from the start, and that it is now too late. If a European financial crisis does not happen next week, it will occur as part of a disorderly default in December when the pain finally becomes too much for Greeks to bear. It is then that we shall all feel the pain of a full-blown financial crisis, most probably followed by more years of economic recession.

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[1] See D Blanchflower ‘As bankshares tumble ..’ New Statesman, 10 Oct  2011.

[2] See http://on.ft.com/qi7ZIw

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Could the euro disappear?

Posted by George Irvin in EU on December 1, 2010

Let me make it clear that I strongly support the euro; I’m a Brit who believes in European integration and who has little time for Euro-sceptics. But I can also see the writing on the wall. The euro—and with it the whole EU integration project—is in grave danger. It is entirely possible that in five years’ time, travelling from Paris to Berlin and thence to Madrid or Rome will entail queuing to change money and struggling through customs posts once again.

Why should the euro be in danger? After all, the Eurozone taken together is in quite good shape, considering the fact that we’ve been though the worst recession since the 1930s. The 16 euro-states’ budget deficit in 2010 as a percentage of GDP is 6.9% (versus 10.2% for the USA); the ratio of public debt to GDP is 84%, far lower than the US figure of 94%.[1] So what’s the problem?

The problem is the peculiar architecture of economic governance. Since tax receipts fall and spending rises in a recession, government deficits necessarily swell and must be financed by borrowing. Because the Eurozone has no federal treasury and cannot emit federal bonds, smaller member states whose domestic bond markets are too narrow must go to the international market to sell their own Eurobonds.

In normal times, member-states’ government bonds are considered a safe bet by the market. But as past financial crises show clearly, bond markets tend to be driven by the herd instinct; ie, once the rumour circulates that one country’s bonds are at risk, everyone joins in. This is commonly known as ‘contagion’, and there’s lots of it about today. Witness the fact that not just Greece, Ireland, Portugal and Spain are under threat, but in the past week Belgium and Italy have been added to the list.

The joint European/IMF bailout plan agreed earlier this year provided some €750bn (€860bn if Greece is included) in potential relief to afflicted countries—with plenty of nasty strings attached, one must add. The plan covers the period 2010-14, but the combined borrowing requirement over 2011-14 of Italy, Spain, Portugal, Greece and Ireland totals nearly €650bn and is growing. Add to this Belgium’s public debt of about €350bn, and the total is €1tr, far larger than the bailout package. The size of the package is unlikely to increase because of political resistance and possible required changes to the Lisbon treaty; per contra, what is likely to increase is the troubled states’ borrowing requirements. The financial markets have already done their sums, the main reason they are betting against the longer-term success of the rescue.

What are the options? First, Chancellor Merkel and President Sarkozy recently agreed on a sovereign debt default mechanism for troubled Eurozone countries thus forcing bondholders to share the bailout pain. Doubtless such a scheme will appeal to taxpayers and sacked public-sector workers alike, but as Paul De Grauwe has noted forcefully, legitimating sovereign debt restructuring makes speculative runs more likely, not less so; ie, the new mechanism increases potential turbulence.[2]

Of course, it is not just the troubled states that are being rescued; it is the major banks holding troubled Eurobonds that are in danger. Everybody knows—except apparently the German electorate—that when Germany ‘bails out’ Greece, the main beneficiaries are German banks (just as the main beneficiary of the recent UK ‘bailout’ for Ireland will be RBS). As ever, these are deemed to be ‘too big to fail’. To ensure their solvency, the European Central Bank (ECB) has been lending them money at a typical rate of 1 percent, money which is then on-lent to Greece or whomever in the form of bond purchases yielding 5 percent or more.

The problem here (quite apart from the big commercial banks making huge profits) is that the resources of the ECB are finite. It simply cannot conjure up another trillion euros if required. Of course it could do so by engaging in Quantitative Easing (QE)—a form of monetisation—but politicians think this will lead to inflation.

And here lies another trap. Although core inflation in the Eurozone remains very low, once energy and food are added back into the measure the rate goes up. In the next few years, food and energy inflation (both largely imported) are likely to accelerate. And if the ECB prints money, politicians—most of whom still believe in the simple ‘quantity theory of money’—will take the blame.

Finally, there is the fundamentalist solution preached by the deficit hawks: make all the ClubMed countries (including those not bordering the Mediterranean) cut their spending and balance their budgets! But there are two problems here. First, budget balancing might be feasible for one country when the world economy is buoyant, but in a world where the OECD economies are stagnating, asking many countries to balance their budget is not feasible. As a recent IMF study shows, ‘expansionary fiscal contraction’ is not the answer.[3]

So what is the answer? The answer is twofold: first, the ECB, not member states, should be able to issue Eurobonds, an idea which has recently gained limited traction. Secondly and more important, in the long term there must be a Eurozone Federal Treasury, akin to the US Federal Treasury. As the President of the ECB, Jean-Claude Trichet, said in the summer “Nous sommes une fédération monetaire. Nous avons maintenant besoin l’équivalent d’une fédération budgetaire” (Le Monde, June 1st).[4] He repeated this warning to a European Parliamentary Committee on 30 November.

To date, Europe’s political class has been unwilling to listen. They argue, inter alia, that Germany’ constitutional court would never cede fiscal sovereignty. Indeed, the tradeoff between monetary and fiscal sovereignty was at the heart of the Maastricht Compromise of 1992. It is most certainly not in Germany’s interest to allow the euro to flounder. Let’s hope Europhiles wake up before it’s too late.

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[1] See FT Alphaville 23 Nov 2010; http://optionalpha.com/european-national-debt-2010-as-a-percentage-of-gdp-9001.html
[2] See P De Grauwe ‘A mechanism of self-destruction in the Eurozone’ 9 November 21010; http://www.ceps.eu/book/mechanism-self-destruction-eurozone
[3] See http://www.social-europe.eu/2010/11/expansionary-fiscal-contraction-and-the-emperor%E2%80%99s-clothes/
[4] See G. Montani, ‘European Economic Governance and fiscal sovereignty’; http://www.thenewfederalist.eu/European-Economic-Government-and-Fiscal-Sovereignty

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Cuts won’t work: the UK example

Posted by George Irvin in EU on October 17, 2010

As the Comprehensive Spending Review is unveiled in Britain, some of you will recall the recent Compass pamphlet, The £100bn gamble, of which I was a co-author.[1]  I’ve just read an exceptionally good short piece by Malcolm Sawyer, Professor of Economics at Leeds, which made me realise that the pamphlet did not pay sufficient attention to Osborne’s highly unrealistic assumptions about just how much the private sector is assumed to expand as the public sector shrinks.[2]  As the current plight of Greece and Ireland shows quite clearly, cutting public sector spending in the name of ‘sound finance’ could make things worse, not better.

To show how shaky the current budgetary assumptions are, Sawyer rightly starts with the basic national accounting identity for the ‘savings balance’:

Investment = domestic private savings plus domestic public savings minus the current account.

Why is the current account (CA) netted from the above? Because if a country is running an external current deficit (which is true for Britain just like the USA), it must be financed by a capital inflow from abroad; in economists’ jargon, such a capital inflow is known as ‘foreign savings’. So if you wish, you can replace the phrase ‘minus the current account’ in the above definition with the phrase ‘plus foreign savings’.

Table 1 below—which I’ve taken from Sawyer—shows the evolution of macroeconomic aggregates used by the Treasury to underpin Osborne’s position.[3] In particular, look at the bottom row which shows the percentage changes implied.

Britain’s problem at the moment can be characterised thus. While domestic private savings is (once again) positive, domestic public savings is negative (the budget is in deficit) while foreign savings (the current account deficit) is high. So if both the government and current accounts are to move to zero, export growth must recover strongly and private investment must shoot up by 2015 must match the pool of domestic private savings.

Table 1:  Key Macroeconomic aggregates 2009-2015 (figures in £bn at constant prices)

Year Household

Consumption

 General Govt Consumption Investment Exports Imports GDP

(mkt prices)

 Houshold savings CA= trade balance
2009 825.5 288.8 182.4 323.3 353.4 1264.6 62.1 -30.1
2010 827.5 293.9 196.6 337.2 373.2 1279.3 61.3 -46.0
2011 837.8 290.5 208.9 355.8 380.8 1309.2 61.1 -35.0
2012 852.1 284.8 225.3 378.1 391.1 1346.3 58.3 -13.0
2013 869.9 278.2 244.7 401.3 405.4 1385.7 55.5 -4.0
2014 888.9 269.8 264.1 424.8 421.4 1423.3 52.7 +3.4
2015 908.7 264.1 282.1 448.9 438.9 1462.0 51.9 +10.0
Change 2015/2010 81.2 -29.8 85.5 111.7 65.7 182.7 -9.46 40.1
%change 9.8 -10.1 43.5 33.1 17.6 14.3 -15.4

Source: Table 1.11 and Table 1.6 (and Table 1.3 for household savings rate) of Office for Budget Responsibility (2010), and calculations (for household savings) based on those Tables.

First, consider the current account. By 2015, it is forecast that the overseas trade deficit will have shrunk to near zero (ie, foreign savings will be negligible). For the period from the beginning of 2011 to the end of 2015, exports are assumed to growth 33% and imports by only 18%. The forecast for the current account in 2015 is the most favourable since 1983. This is totally at odds with the current trend. In the past decade, imports have grown faster than exports. Moreover, despite a nominal devaluation of 23% since 2008, export growth in 2010 was still negligible.

Next consider domestic savings. With the budget assumed to be in balance by 2015, government savings is zero. Household savings decline somewhat as a percentage of GDP. Although corporate savings do not appear explicitly, these can be calculated and their GDP share is seen to fall by about 10%. Such a result is important since corporate savings are such a large proportion of total domestic savings. But corporations have been busy ‘deleveraging’; ie, rebuilding savings. In reality, it is difficult to see why corporate savings would fall for the period in question.

Crucially, it will be seen that investment is assumed to rise by 44% between 2011 and 2015. UK gross Investment (including public investment) at present in slightly less that 14% of GDP: the Treasury assumed that it will reach over 19% of GDP by 2015. This is higher than at any time in the past decade, and is to be achieved despite cuts in public sector investment. The resulting annual GDP growth rate forecast for the period 2011-2015 is 2.7%, higher than the underlying trend growth rate in the past decade.

In summary, if private investment does not growth as rapidly as forecast, if export growth does not quickly outpace that of imports and if domestic savings do not fall enough, it will not be possible to balance the budget. This is not a matter of conjecture but of national accounting definitions. Moreover, as Sawyer’s piece rightly argues, since the probability of each of the above outcomes is not high, the probability of their joint occurrence is remote. George Osborne’s gamble looks problematic indeed!

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[1] See http://www.compassonline.org.uk/news/item.asp?n=11115

[2] See M. Sawyer ‘Why the structural budget deficit will not be eliminated by 2015’;  http://129.11.89.221/MKB/MalcolmSawyer/budget2010.pdf

[3] See HM Treasury (2010a), Budget 2010, London: The Stationary Office, HC61; also Office for Budget Responsibility (2010), Budget 2010:The economy & public finances– supplementary material

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Deficit hysteria will kill Europe

Posted by George Irvin in EU on May 29, 2010

It’s not just Britain’s £6bn in cuts—deficit hysteria is sweeping the rest of the EU. First it was Ireland where draconian spending cuts have led to an estimated 9% annual fall in GDP this year and resulted in widening the budget deficit. Then Greece, where an EU-IMF imposed deficit reduction plan of 10 percentage points over two years has led to a forecast fall in GDP of 20%.

Today it’s Spain and Italy which have recently announced €15bn and €25bn respectively in austerity measures. Portugal has accelerated its budget reduction programme to get from 9% in 2009 to below 3% by 2013, or by about 2.5% a year.[1] In France, where the budget deficit is 8%—well below Britain’s—President Sarkozy is under pressure to follow Ms Merkel’s budget balancing act. Lest anybody forget, in 2009 Ms Merkel committed Germany to a permanently balanced annual budget after 2016, the so-called ‘debt-brake’ law, which means extra budgetary cuts amounting to €10bn per annum.[2]

A lost decade?

As though all this fiscal tightening were not bad enough, the OECD has recommended tightening monetary tightening as a precaution against inflation.[3] Both the Bank of England (BoE)  and the ECB are thought to be considering raising interest rates at the end of 2010, despite the fact that the ECB forecasts that the Eurozone will contract by 4.6% this year and that in June inflation fell 0.1% compared to a year ago, the lowest inflation rate since 1953.

What does all this mean for growth? Take the Eurozone-16 countries alone; their average current deficit in 2010 is about 7% of GDP, and it will probably be 8% next year. The current aim is to bring this figure within the 3% limit by 2013; ie, to make budgetary savings of 5% over two years. If we assume a (small) government spending multiplier of  1.5 and that its impact is distributed evenly over the three years following 2013, this would mean a 2.5% annual loss in growth until 2016. But average Eurozone growth since 2001 has only been just above 1% per annum, so we can expect deficit cutting to lower future growth to near zero (or less).

In short, Europe’s pro-cyclical budget cutting will, at worst, prolong the slump turning it into a 1930s style depression. At best, it will produce Japanese-style stagnation, a ‘lost decade’.  Whichever of these outcomes occurs, the economic and social costs will be high. Growth elsewhere in the world will be affected—this is what the quick European tour by Messrs Geithner and Summers is about. Prolonged unemployment means that a whole generation will remain jobless, and even when recovery takes place, they will enter the labour market without the skills they would otherwise have acquired and thus with little bargaining power. Many industries will decline, and some will disappear altogether, as will the wider communities which they helped support. Income and wealth inequalities will grow.

Perhaps most disturbing is that Europe’s ‘social model’ will be so deeply damaged by lack of public finance that it will in effect cease to exist, or else become a patchwork of  support programmes for the ‘deserving poor’ (those in work) as in the Anglo-Saxon countries. The deficit cutters are burrying Social Europe.

Why?

Why has it come to this? The answer lies partly in the power of the financial sector, and partly in the near universal acceptance of neo-liberal ideology. Like Britain and America, Europe has poured in excess of a trillion euros into bailing out its banking sector. Doubtless this was correct at the time. But as the recent sovereign debt crisis has shown very clearly, the very same financial markets that governments bailed out have raised sovereign borrowing costs to exorbitant levels for Greece and others while making fistfuls of money short-selling their Eurobonds.

Although there has been fresh impetus for greater regulation of financial markets—led to their credit by France and Germany—there has been no corresponding change in ideology.  The orthodox ideology is not so much monetarist or even Austrian—-it is quite simply the ‘common sense’ notion of bankers and shopkeepers alike that an economy’s budget is no different from the family budget. They assert that a sound budget, whether private or national, must balance.

As I have argued elsewhere, both Friedman and Keynes would have agreed that the financial crisis required the banks to be bailed out—which Europeans have done generously.[4] Where Keynes disagreed with the prevailing orthodoxy during the Great Depression was on the question of balancing the budget. Keynes argued famously that when the private sector was rebuilding its saving, government must spend more; otherwise, aggregate demand would fall leading to falling output, employment and tax revenue.

Some of Ms Merkel’s slightly more sophisticated followers (eg, George Osborne in the UK) would argue that more state spending leads (through inflation or increased borrowing) to higher interest rates which ‘crowd out’ private sector investment. Unfortunately, for this argument to be true, one would need to show that ‘full’ crowding out takes place, something which according to this theory can only happen at the natural rate of unemployment. Since the ‘natural’ unemployment is unknowable, the argument fails.

As for Keynesian economics, despite the near Depression of 2007-09 many of Ms Merkel’s colleagues appear to remain blissfully ignorant of the subject. As Keynes explained in his ‘paradox of thrift’, although saving may be a good thing for individuals and businesses, the more a country tries to save, the more income falls and the less it can actually save. A good example of economic illiteracy is the oxymoronic title of a recent piece published by two journalists in the influential magazine, Der Speigel, ‘European  austerity is the first step to recovery’.[5] As the Berliner Zeitung put it, the end result of this sort of nonsense is that: ‘Europe will save its way into the next recession’.[6] A deeply pessimistic conclusion, but inescapable I’m afraid.

[1] See http://www.ibtimes.com/articles/22922/20100509/portugal-promises-eu-to-cut-budget-deficit-more-in-2010.htm

[2] See http://www.spiegel.de/international/germany/0,1518,696760,00.html

[3] See http://www.guardian.co.uk/business/2010/may/26/oecd-backs-coalition-spending-cuts

[4] See http://blogs.euobserver.com/irvin/2010/04/13/why-sound-money-is-unsound/

[5] See http://www.spiegel.de/international/europe/0,1518,697098,00.html

[6] See http://www.spiegel.de/international/europe/0,1518,697098,00.html

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A banker’s tax for the EU!

Posted by George Irvin in EU on April 7, 2010

Most readers will have heard of the ‘Robin Hood tax’—now under study at the Commission—a well-chosen term for what economists refer to in their jargon as a Currency Transactions Tax or ‘Tobin tax’ (see my earlier piece on this blog). The basic idea is that the word financial market is now so large that taxing it at some miniscule rate (0.05%, or 50 euro cents in every €1,000 traded) would rake in billions.

How much would it raise?
Just to give you some idea, the Bank of International Settlements (BIS) estimates that in 2007 the world’s yearly currency transactions totalled US$800tr (that’s fifteen time world GDP, or nearly a quadrillion dollars) of which 80% is purely speculative. A 0.05% tax on this annual turnover would yield 400 billion dollars (about €250bn) each year, enough to fight poverty, deal with global warming and have shedloads of money left over for repairing our government budgets. Because almost all such trades are computerised, software already exists for collecting such a tax wherever it takes place.

And even if financial markets were able to avoid tax on half that sum, we’d still be getting US$200bn per annum. It’s a no-brainer, really.

The pros and cons

Or is it? A lot of bankers and financial journalists oppose it. In essence, the ‘devil’s advocate’ argument against such a tax consists of four questions: (1) will the proceeds reach the right people? (2) is 0.05% high enough to stop speculative activity? (3) will the bankers find a way of ‘passing it on’? and (4) can it work unless the US supports it?

‘Will it reach the right people?’ is always a concern, but to reject a Robin Hood tax on those grounds is a bit like rejecting aid to the victims of the Haitian earthquake on the grounds that some small percentage of them are thieves.

Is 0.05 high enough? That’s a good question: James Tobin originally proposed 1% in the 1970s, then decided two decades later than 0.1 would be enough to ‘place grit in the wheels of the speculators’. If not, there are at least two remedies. First, the tax could be varied according to the type of trade involved, with higher rates on, say, short-term derivatives than long term futures contracts. Secondly, to avoid foul play, such a tax could be complemented by a new bankruptcy regime requiring unsecured creditors and other counterparties to be forcibly and swiftly converted into shareholders, until the failed institutions are adequately recapitalised.

Will bankers ‘pass it on’? The answer is that where the tax is low and the market highly competitive, it probably won’t be worth their while? After all, Britain levies a stamp duty of 0.5% on everyday share trades, and nobody argues that that banks and brokers ‘pass it on’ to the average citizen. Banks and brokers ‘take a fee’ on such trades, just as they do on currency trades, but the fee is paid by the counterparty.

What if the US doesn’t play ball?

Finally, can it work if the US is opposed? But who in the US is opposed? Tim Geithner, Obama’s Treasury Secretary, seems opposed, but he’s an ex-banker who has worked closely with Bush’s Treasury Secretary, Hank Paulson. Larry Summers, Obama’s chief economic advisor, was an early advocate of a Tobin tax. Obama himself is keeping quiet for the moment because he’s anxious not to make any more Congressional enemies.

If Germany, France and Britain—all of whom support some form of Robin Hood tax—were to proceed unilaterally, it is hard to see how the US could oppose it. Moreover, with the US budget deficit approaching 10% of GDP and much of the US press calling for budget balance, a Robin Hood tax is Obama’s lifeline.

Who’s betting billions against the euro at the moment? The big financial speculators, that’s who! A Robin Hood tax is both quite feasible, and it imaginatively reflects the public’s desire to make the speculators pay for the havoc they have caused.

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Understanding the Eurozone’s structual imbalances

Posted by George Irvin in EU on March 18, 2010

In an earlier piece, I argued that the ‘Club Med crisis’ reflects Eurozone trade imbalances similar in nature to the more serious trade imbalance which exists between the US and  China. By definition, the solution to this problem cannot be for all countries to become net exporters like Germany. Rather, what is needed is a rebalancing of trade.

This can best be accomplished though two broad measures. First, like China, Germany must stimulate domestic demand so that domestic consumption and investment rise faster than exports. Secondly, the Eurozone must recognise the need for better economic governance.

The latter should not be about enforcing ‘more fiscal discipline’ on the periphery at the cost of peripheral wages, but rather about giving the ECB a broader remit (growth and employment rather than inflation targeting) and establishing a Federal Budget large enough to redistribute surpluses—just as happens in the United States.

Eurozone Current Account Balances as %GDP

Source: IMF (in Lapavitsas et al, 2009)

Two-thirds of German trade is within the Eurozone, while the Eurozone’s trade with the rest of the world is roughly in balance. The accompanying graph clearly shows Germany’s surplus to be mirrored by the ‘Club Med’ deficit.  No devious plot is implied; this situation arises because somebody’s surplus is by definition somebody else’s deficit.

Obviously, small surpluses and deficits are not the problem.  Rather, it is when the surpluses and deficits become large and entrenched over many years that action must be taken. Clearly, reform of economic governance is required if the Eurozone is to prosper in the long term. Just as the China-US trade imbalance is best resolved by increasing aggregate demand in China and recycling surpluses rather than by means of expenditure contraction in the US (the cost of which would be further recession), the Eurozone trade imbalance cannot be resolved by inducing recession in the Mediterranean.

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