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The Greek Crisis Reveals the Fatal Weakness of the Euro and the Gold Standard
Raymond Richman, 4/29/2010

The headline in the WSJ (4-28-10) reads, “Crisis Spreads in Europe, Debt Downgrades in Portugal, Greece Sow Fear of Contagion.” The same article recites  “The yield on Germany’s 10-year bond fell to 2.99%.”  The following day, the headline read “Contagion Fear Hits Spain.” What is Germany doing right that Greece, Portugal, and Spain are doing wrong? For one thing, and we believe the main thing, Germany exports more than it imports while the others import more than they export. So Germany accumulates euros and foreign exchange while the others run out of euros and foreign exchange. Since their debts are payable in euros, they become unable to service their debts. As the following table shows, Greece, Portugal, and Spain display trade deficits in 2008 and 2009, the first a more or less normal year of growth, the latter a recession year.                

           Exports and Imports, selected countries


(Billions of U.S. Dollars)




















































                Source: CIA, World Fact Book

The solution the article talks about is a loan of €45 billion from the EU and the IMF, a condition of which would be for Greece to tighten its belt and balance its budget averting its need to borrow. But a balanced budget is no guarantee that exports will rise and imports will fall. The U.S. enjoyed a balanced budget in 2000. Nevertheless, the trade deficits exploded.  

A majority of Germans oppose bailing Greece out because of the latter’s evident profligacy. Negotiations between the EU, the IMF, and Greece are expected to be completed in early May which would allow Greece to meet its many debt repayments due May 19. Then if Greece balances its budget, the problem will be solved, maybe. That is the accepted theory. But the credit agencies are not so sanguine. What is the link between Greece’s budget deficit and its trade deficits,  the direct cause of Greece’s running out of euros? Standard & Poor’s doubts that the bailout will be enough, releasing a pessimistic forecast for Greece’s growth prospects. There is no mention in the WSJ articles or the credit agencies that Greece, Portugal, and Spain are running out of euros because of their trade deficits.

It is not politically correct to argue that the countries experiencing trade deficits may be the victims of their trading partners that are pursuing mercantilist strategies to maintain and grow trade surpluses. Economists limit themselves to extolling growing trade, ignoring the fact that imports may be growing faster for some countries than exports.

The U.S. has experienced huge trade deficits which it paid for and continues to pay for with the enormous flows of foreign savings from Japan, China, Germany, and oil producing countries that are invested in U.S. government obligations, banks, and securities markets.  If and when those flows stop, the U.S. cannot go bankrupt since all of its obligations are payable in U.S. dollars and we own the printing presses. Were the U.S. and its trading partners still on the gold standard, the U.S. would be in the same straits as Greece, Portugal, and Spain. It would have run out of gold long ago. But with our debts payable in dollars, we can simply pay them off with newly printed $100,000 bills.

Whenever a country is on a gold standard or a euro standard, or – what is in prospect – the IMF drawing rights standard and experiences growing losses of foreign exchange, it is expected to do what Germany, the European Central Bank, and the IMF will recommend to Greece, Portugal, and Spain– balance its fiscal budget regardless of the domestic consequences: a prolonged recession, massive unemployment, lower real wages, and incomes.

There is another alternative which we have been recommending for the U.S.: Impose a uniform tariff on all imports from its trading partners with whom it has been experiencing chronic trade deficits. It will not only earn revenue, it will balance trade and give us time to bring the domestic budget under control by expenditure reductions and tax reforms. It will also give our trading partners time to end their mercantilist practices which are de-industrializing the U.S. economy.

Unfortunately, Greece, Portugal, and Spain cannot print euros or levy import duties. It seems likely that Greece, Portugal, and Spain will have to retire from the EU – at least from the euro zone until they get control of their foreign trade and their domestic budgets. One other way out would be for Germany to invest more and import more from Greece, Portugal, and Spain. If it invests enough and soon enough and imports enough, the evil decree can be avoided.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]