From Pain to Gain on the EU Frontier

BRUSSELS – The first act of the eurozone debt drama was about whether any European Union member country could ever become insolvent. It ended when the highest EU authority, the European Council, officially recognized in late July that Greece does need a reduction in its debt obligations.

But that acknowledgement of reality does not end the drama. The second act will be about restoring growth prospects for the EU periphery, which will pose an even more difficult challenge.

The key problem is simple: until 2008, these countries enjoyed a long boom based on cheap and plentiful credit, which allowed them to finance large current-account deficits. But any import boom creates a misleading impression of the local economy’s productive capacity.

Imagine a country that increases its imports of, say, cars and other consumer goods by 10% of its starting GDP. These goods are sold to local consumers via car dealers and a whole chain of traders and retailers. All of these intermediaries have costs that have to be paid by the local consumer, which flatters the national GDP statistics, because, technically speaking, all of these costs constitute value added in intermediation services. An import boom thus also leads to higher measured GDP growth.