Thursday, April 11, 2013

From Mexico, Lessons for Europe

Mexico in the 1980s looked a lot like most Southern European countries today writes Eduardo Porter in the New York Times (April 9, 2013). Excess debt threatened to bankrupt the country. In the end enforced austerity was not enough. Countries that cannot grow will not repay their debts. Today, the economies of Ireland, Portugal, Spain and Italy are smaller than they were five years ago, but their debt burden is heavier. And still, European leaders insist that more of the same (more debts and more austerity) must be the solution.

In Mexico, finally, Nicholas Bready, the US Treasury secretary, had to prepare a plan for banks to reduce Mexico’s debts on a “voluntary” basis: strong-armed by the US, banks had to swap old Mexican debt for “Brady bonds” that offered a reduction in principal and below-market interest rates.

Debt reduction was a key for a return to growth and the economy expanded by 4 percent the following year. But Mexico had a further recipe for growth that present day Southern European economies have not: it devalued its currency to gain export competitiveness.

Couldn’t politicians in Berlin and Paris get the lesson right? “Northern” banks must accept a partial Southern debt default while the single European currency  should be allowed to depreciate (see the current Japanese experience), paving the way for an easier exit from the euro for some (my recent book on Euro Exit).  

The article is well worth reading here.

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