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Eurozone experiment proves that imbalanced trade leads to disaster
Howard Richman, 5/23/2012

The 13-year-old Eurozone experiment gave the world a laboratory in which to test the theory that free trade leads to prosperity. The results of the experiment prove, instead, that free trade, when imbalanced, leads to disaster.

The common perception is that the Eurozone crisis is due to the huge national debts of the Southern European countries. Although government debt is clearly part of the problem, it is not the only part or even the main part. The following graph shows the weak relationship between national debt (government debt divided by GDP) and unemployment rates.

UnemploymentAndDebt0512.gif

Although Greece, the worst off of the Eurozone countries, has a huge government debt at 165% of its GDP, Spain and Portugal are close to bankruptcy even though Spain’s government debt is a modest 69% of GDP and Portugal’s government debt is just 108%. Both Germany (81% of GDP) and Belgium (98% of GDP) have similar government debt levels, but no crisis whatsoever, since they have trade surpluses.

When a country has a chronic trade deficit, its people go ever further into debt to buy imports. As a result, trade deficit governments tend to owe their debt to foreigners while trade surplus governments tend to owe their debt to their own people.

The Southern European governments grew their debt in an attempt to spend their way out of their high unemployment rates. They failed because, as the following chart shows, their high unemployment rates were related to their trade deficits:

Balanced trade can grow forever. Imbalanced trade eventually bankrupts the trade deficit countries.

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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]

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  • [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....

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  • 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]