Teaching Exchange Rates and Balance of Payments in the Context of the Eurozone Crisis The Economic Environment: Teaching Exchange Rates and Balance of Payments in the Context of the Eurozone Crisis Presentation for NZABE Conference Wintec, Hamilton, 2 October 2012 Keith Rankin [ ] Department of Accounting and Finance Faculty of Business and Creative Industries Unitec Institute of Technology

Introduction confused Level 5 Economics confused Level 5 Economics – 3 types of economics with different assumptions all blended into standard introductory courses a)full-employment neoclassical win-win economics b)unemployment/recession lose-lose economics c)mercantilist zero-sum win-lose (lose-win) economics we need to be more clear when we shift assumptions away from (a) we need to be more clear when we shift assumptions away from (a) – (b) is discussed in recent context by Paul Krugman (2008,2012), Richard Koo (2009,2011) – (c) relates to international economics especially when we move away from balanced trade

Mercantilism represents business and political practice in the early (pre-industrial) period of global capitalism represents business and political practice in the early (pre-industrial) period of global capitalism – 15 th to 18 th centuries reflected in economic thought of the time reflected in economic thought of the time – doctrine that nations should aim to achieve a trade surplus (seen as a 'win') every year and should practice deficit-avoidance strategies – supremacy of production over consumption mercantilist strategies in the 1920s mercantilist strategies in the 1920s – contributed significantly to the Great Depression

Figure 1: Analysis from Google NGRAM

Teaching International Trade at Level 5 we start appropriately with balanced trade and the resulting win-win 'gains from trade' we start appropriately with balanced trade and the resulting win-win 'gains from trade' – imports are clearly presented as benefits, and exports (what are given up) as costs 'inter-temporal trade – we don't but could address unbalanced trade as 'inter-temporal trade' (Corden) this allows students to understand inter-country debt debt servicing clearly understood as a net flow of goods and/or services from debtor to creditor countries – instead we refer to 'surplus' countries as if that has the same meaning as 'creditor' countries we drift into the ' exports-good imports-bad ' idea we drift into the ' exports-good imports-bad ' idea

Eurozone Crisis: Teaching Balance of Payments Figure 2 easy interpretation is that North are winning; South are losing really, all are losers in a systemic problem of unbalanced trade

Eurozone Crisis: Systemic Approach to Teaching exemplar case-study of unbalanced trade exemplar case-study of unbalanced trade – systemic unbalanced trade zone within a global economy with chronic fiscal imbalances and with a perverse floating exchange rate system fixed system of exchange rates collapsed fixed system of exchange rates collapsed – 1910s, 1930s, 1970s – Eurozone an extreme form of fixed exchange rates in which even devaluation is not an option northern Eurozone (eg 'BANG') countries northern Eurozone (eg 'BANG') countries – persistent trade surpluses; undervalued currency reverse applies to southern Eurozone 'PIIGS' reverse applies to southern Eurozone 'PIIGS'

Current Account Rebalancing Solutions northern and southern Euros ? northern and southern Euros ? – need to imagine creditor countries running deficits, and debtor countries running surpluses is it a matter of northern winners and southern losers? austerity ? austerity ? – reminiscent of failed 1920s' strategies to achieve rebalancing deflation in trade-debtor countries – failed then, in part because creditor countries would not play their part 'deficit' countries could not import more (had to import less) and 'surplus' countries would not import more 'surplus' countries need inflation to balance the deflation imposed on the debtor countries

Precedent: Australasia in the 19 th century seven countries with a single currency (£) seven countries with a single currency (£) – region net debtor; ongoing finance restricted 1890s – problems of unbalanced trade labour market mobility short term resolution through labour market mobility doesn't resolve government component of external debt – longer term solution --- political union formation of Commonwealth of Australia in 1901 New Zealand chose not to participate inter-provincial reduced problem from extra-national to inter-provincial federal government activity smoothed imbalances Eurozone Eurozone – compare and contrast East Germany with Greece – futile to seek huge wage disparities in EU

Conclusion economics should be taught with consistent assumptions about costs and benefits economics should be taught with consistent assumptions about costs and benefits – mercantilist assumptions should be rejected chronic trade imbalances in the real-world present great opportunities to teach chronic trade imbalances in the real-world present great opportunities to teach – debt as inter-temporal trade the requirement for completion of such trade contracts – contrasting exchange rate mechanisms means to correct trade imbalances real-world failures of these mechanisms – the consequences of unresolved imbalances use-it or lose-it principle: spend your credits or lose them