HSBC: Euro Meltdown to Spark Another Great Depression

Monday, 17 Oct 2011 04:22 AM

By Michael Kling

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Northern Europe must share the burden with southern Europe or face a "monumental economic failure," writes Stephen King, global chief economist for HSBC in The Independent.

They should share the burden because they are partly to blame for the crisis for lending so much to southern countries. If they don't, a euro meltdown will pave the way for another Great Depression.

"The creditors chose to blame those in the south for having borrowed too much," King writes. "Yet, it was at least as much a story about the creditors having lent too much."
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Past interest rate trends prove this point, he argues. If borrowers wanted to persuade lenders to lend them more money, interest rates would have increased. However, if lenders wanted to convince borrowers to borrow more money rates would have fallen.

Interest rates fell lower and lower until the 2008 financial crises, King notes. "For much of the euro's life, the story has been much more about the generosity of lenders than the desperation of borrowers."

If the euro disintegrates, massive financial anarchy could throw the world into another Great Depression, he warns. The northern creditors will suffer as much as anyone else. So Germany and France must take political risk to find a solution rather than risk a complete economic failure.

Besides being unfair, austerity measures are not working, King argues.

Economist Paul Krugman, writing in his column for The New York Times, agreed that austerity measures are a mistake. Instead of helping countries like Greece repay their debts, cutting public spending increases unemployment and makes their economies worse.

A better solution is to stoke inflation in Germany and other stronger countries, Krugman argues. That would help debtor countries cut their prices and costs relative to strong nations with higher inflation.

After the euro was introduced, German exports went through the roof, King writes. Germans happened to make goods that others wanted and they controlled their labor costs. Instead of buying goods from other countries, which would have controlled their trade balance, Germans saved the income, causing their trade surplus to soar. Those savings needed some where to go, and much of it was lent to southern European countries.

Many Germans think everything would be fine if others should follow their example.

"While it's a familiar lament, it is also economically illiterate," King explains. "For every German trade surplus, there has to be an offsetting deficit elsewhere in the world."

Contrary to common belief, trade surpluses don't necessarily indicate competiveness, he asserts. Actually, trade surpluses are created by an imbalance between savings and investment.

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