Fixing the Economists Article of the Week

by Philip Pilkington

It is often the case that whole debates rest on a misunderstanding or lack of clarity over the definition of key terms. Take the ongoing debates between the group I label as the Kaldorians and the Modern Monetary Theorists (MMTers) over whether or not the Eurozone crisis is a balance-of-payments (BoP) crisis.

 

A good example is a 2013 paper by Sergio Cesaratto. Cesaratto’s understanding of the debate is well summarized by the following quotation:

If one looks at the EMU through European lenses, one sees it as a collection of independent states with a currency in common and the crisis as a BoP crisis, albeit with some idiosyncrasies related to the monetary union. If one looks at the EMU through American lenses, one sees a flawed federal state with an irreversible commitment to the CU and the financial crisis appears due to the absence of adequate federal prevention and resolution mechanisms. If the EZ were a viable federal union, there would be no such crisis, the American argues. The disenchanted Euro-sceptic replies that the EZ is not a full federal union and is unlikely to evolve in that direction. Thus, the first perspective seems more realistic and the EZ crisis closer to a traditional BoP crisis. (Pp8)

From the perspective of this disenchanted European Euro-sceptic this whole debate rests on a poor definition of terms. You see, a BoP crisis has an alternative name: its called a “currency crisis”. The 
Wikipedia article is representative of this:

A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments.

You see, a BoP crisis requires that an entity has its own currency otherwise its not a BoP crisis. It is as simple as that. If this were not the case then we could interpret anything as a BoP crisis. The poverty in the neighborhood down the street? Oh, that’s a BoP crisis; their current account deficit is too large. The bankruptcy of Detroit? BoP crisis. And so on and so on.

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