Thursday, December 29, 2011

Harvard Economics Professor tries to explain the Euro for the French.

Professor Martin Feldstein writing in Project Syndicate, linked here, has tried to explain some of the present problems of the Euro currency for the French, whom he states " Don't Get It".

Two paragraphs set out the main thrust of his case which, puzzingly for me, seems to ignore the growing incongruities within the ECB and the mystery as to eventual liabilities for the staggering debts and worthless assets it is now accumulating:

If investors are unwilling to finance the French budget deficit – that is, if France cannot borrow to finance that deficit – France will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France’s budget deficit is 5.8% of its GDP, whereas Britain’s budget deficit is 8.8% of GDP.

There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.

The Professor concludes with a suggestion that it is policies at home that France should be considering, (as urged on this blog) as follows:

France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain or calling for political changes that are not going to occur.

Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan's Council of Economic Advisers and is former President of the National Bureau for Economic Research.
Copyright: Project Syndicate, 2011.

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