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The Eurozone Island of Stability

9 13 4

BRUSSELS – Market volatility has surged lately, apparently vindicating those who have warned of lofty equity valuations. But, even as the US stock market suffered one of its worst weeks since the financial crisis, the eurozone’s public-debt market has remained relatively stable, with risk spreads – which have usually increased amid market volatility – scarcely changing, even for the peripheral eurozone countries.

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The eurozone owes its ostensible immunity from financial-market gyrations to major improvements in the peripheral economies’ fundamentals: growth has picked up, and unemployment, though still high, is declining rapidly. The question is whether these improvements are stable enough to ensure the eurozone’s continued resilience.

Here, the key concern is that the current recovery is too dependent on low interest rates: if borrowing costs rise, the periphery’s debtor countries would suffer. But it is no longer accurate to view the economies of the periphery as weak debtors. Indeed, with the exception of Greece, they are all now running current-account surpluses, meaning that far from depending on capital inflows, they are repaying their foreign debt.

And, yes, this includes Italy, which, despite its high public debt, is running a current-account surplus at the aggregate level. In the past, Italy’s external deficits and surpluses were of roughly similar size, meaning that the country is not a net debtor. Because its net international investment position is balanced, a generalized interest-rate hike would not necessarily be bad for the country. The government would face higher debt-service costs, but citizens would earn more on........

© Project Syndicate