By Avraham Baranes
Modern Monetary Theory (MMT) emphasizes the Sectoral Balances approach. According to the sector balances identity:
Domestic Priv. Sector Balance + Domestic Public Sector Balance + Current Account Balance = 0
It follows that:
Domestic Priv. Sector Surplus = Domestic Public Sector Deficit + Current Account SurplusThe deficit rules for the EU state that each countries budget deficit may not exceed 3% of GDP. This has the unintended consequence of also restricting the maximum sustainable current account deficit to 3%. At any current account deficit greater than 3%, the Domestic Private Sector Balance (DPSB) will be negative, a truly unsustainable situation as Wynne Godley famously predicted. Since 1999, the big winner in the EU has been Germany. Simply looking at current account balances, Germany moved from running small current account deficits in 1996 to amassing large surpluses after 2001. In the meantime, Italy, Ireland, and France saw their current account balances move from surplus (in the case of Italy and Ireland, quite substantial ones, more than 3% of GDP) to deficit.
Domestic Priv. Sector Balance + Domestic Public Sector Balance + Current Account Balance = 0
It follows that:
Domestic Priv. Sector Surplus = Domestic Public Sector Deficit + Current Account SurplusThe deficit rules for the EU state that each countries budget deficit may not exceed 3% of GDP. This has the unintended consequence of also restricting the maximum sustainable current account deficit to 3%. At any current account deficit greater than 3%, the Domestic Private Sector Balance (DPSB) will be negative, a truly unsustainable situation as Wynne Godley famously predicted. Since 1999, the big winner in the EU has been Germany. Simply looking at current account balances, Germany moved from running small current account deficits in 1996 to amassing large surpluses after 2001. In the meantime, Italy, Ireland, and France saw their current account balances move from surplus (in the case of Italy and Ireland, quite substantial ones, more than 3% of GDP) to deficit.
