Can a Country Without a Currency Have a Currency Crisis?


It is often the case that whole debates rest on a misunderstanding or lack of clarity over the definition of key terms. Take the ongoing debates between the group I label as the Kaldorians and the Modern Monetary Theorists (MMTers) over whether or not the Eurozone crisis is a balance-of-payments (BoP) crisis. A good example is a recent paper by Sergio Cesaratto. Cesaratto’s understanding of the debate is well summarised by the following quotation:

If one looks at the EMU through European lenses, one sees it as a collection of independent states with a currency in common and the crisis as a BoP crisis, albeit with some idiosyncrasies related to the monetary union. If one looks at the EMU through American lenses, one sees a flawed federal state with an irreversible commitment to the CU and the financial crisis appears due to the absence of adequate federal prevention and resolution mechanisms. If the EZ were a viable federal union, there would be no such crisis, the American argues. The disenchanted Euro-sceptic replies that the EZ is not a full federal union and is unlikely to evolve in that direction. Thus, the first perspective seems more realistic and the EZ crisis closer to a traditional BoP crisis. (Pp8)

From the perspective of this disenchanted European Euro-sceptic this whole debate rests on a poor definition of terms. You see, a BoP crisis has an alternative name: its called a “currency crisis”. The Wikipedia article is representative of this:

A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments.

You see, a BoP crisis requires that an entity has its own currency otherwise its not a BoP crisis. It is as simple as that. If this were not the case then we could interpret anything as a BoP crisis. The poverty in the neighborhood down the street? Oh, that’s a BoP crisis; their current account deficit is too large. The bankruptcy of Detroit? BoP crisis. And so on and so on.

In the literature a BoP crisis, as distinct from other crises, is distinguished by a rise in the current account deficit leading to pressure on a country’s currency. But if a country doesn’t have its own currency then this cannot happen. The situation is reflected in the fact that Irish and Spanish euros can still buy as many BMWs from Germany as they could before the crisis. While in a real BoP crisis this would not be the case; the BMWs would become more expensive.

So, why are good economists making such manifestly silly mistakes? Well, this goes back to the work of what I call the Kaldorians — who, by the way, are not reflective of the work of Nicholas Kaldor. The Kaldorians are obsessed with BoP crises; they see them everywhere and anywhere. Because their models are so focused on trade imbalances they forget the meaning of the term “BoP crisis” and interpret almost everything as a BoP crisis. When all you have is a hammer everything quickly starts to look like a nail.

Am I saying that trade imbalances in the Eurozone are unimportant? No. They are very important in that they have resulted in dangerous imbalances of effective demand. But that is not the same as saying that the Irish or Spanish crisis is a BoP crisis. So, let’s be categorical about this: a country without its own currency cannot suffer a currency/BoP crisis with its neighbors who share its currency. To say otherwise is to abuse the lexicon of economics and, frankly, to look a little silly.

Update: As always happens when you call people out on their misuse of words there has been some bickering. Here I will provide links that support my definition of a BoP crisis as requiring the entity undergoing said crises to possess its own currency. If people want to dispute this definition they must provide credible sources to the contrary. I think that they will quickly find that mine is the consensus view and their’s is the idiosyncratic view that seems to have grown out of the work of Thirlwall.

(1) Wikipedia article on currency crisis notes that it is the same as a BoP crisis.

(2) Wikipedia article on balance of payments crisis notes that it is the same as a currency crisis and involves an attack on a country’s currency.

(3) article states that current account deficit must be unsustainable which is not the case in a currency union.

(4) Financial Dictionary also states that the current account must be unsustainable.

(5) The IMF, while it distinguishes between a BoP crisis and a currency crisis, notes that a BoP crisis is one that “involves a shortage of reserves to cover balance of payments needs” which is clearly not the case in a monetary union.

I think that is enough evidence for now. I welcome commenters to provide credible sources to the contrary. And no, articles by Krugman and Martin Wolf that use the wrong definition are not sources. A source must actually lay out and justify the definition of the term.


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Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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70 Responses to Can a Country Without a Currency Have a Currency Crisis?

  1. Ramanan says:

    Oh please oh please. It is this same silliness which was used to push the formation of the Euro Area.

    “So, let’s be categorical about this: a country without its own currency cannot suffer a currency/BoP crisis with its neighbors who share its currency.”

    While it is true that there is no exchange rate crisis it is nonetheless a balance of payments crisis.

    That is why there are two distinct terminologies – exchange rate crisis and balance of payments crisis.

    It is there directly in the data. The ones who were the worst net international investment position were the ones hit hard.

    In fact, a nation such as Greece or Portugal is faced with a bigger balance of payments problem that a nation with its own currency because it becomes more reliant on exports to improve aggregate demand.

    It is you who are abusing language.

    And talking of regional differences, it is true. Regions who are backward in a single country with its own currency have low competitiveness and hence it affects its balance of payments. Poor regions have poor competitiveness. The difference is that they receive automatic fiscal transfers which helps them and partly stabilizes the regional economy.

    You are abusing the language.

    • I need a source on this. Give me a credible source that distinguishes BoP crises from currency crises. Otherwise you’re just making stuff up.

      • Ramanan says:

        Well economics is not a science with ultimate authority. It just has some leaders from various schools. So I don’t know what a credible source is. There is hardly any agreement or consensus and the self named consensus is quite wrong which is why we have heteredoxy.

        If you pick up some encyclopedia you will find references to the money multiplier and the orthodox causality. So do I start believing in that?

        So what is a credible source? Even the Wikipedia article mentions the Euro Zone as a balance of payments crisis.

      • See the update. I have provided five references.

        The Wiki article that says that the EZ crisis is a BoP crisis is just reflecting the views of a couple of economists. It is not a definition.

        The reason why mine is the consensus view and your’s is the fringe view is because in your view almost anything can be interpreted as a BoP crisis. In my view — the consensus view — only a very specific type of crisis is a BoP crisis. That is why I’m not just complaining that you are misusing words but also that your misuse of words renders these words meaningless.

      • JakeS says:

        Of course you can interpret almost any crisis as a balance of payment crisis: Just draw an appropriate boundary across which to measure balance of payments. The question is not whether you can draw such boundaries, it is whether the boundaries you draw are analytically useful and institutionally meaningful.

        And to know that, you need to look at the power relationships backing the coins, not at what is stamped on them.

        – Jake

      • Translation of JakeS’s comment:

        “I use my knowledge of economics not to do neutral analysis but to engage in political posturing and I will redefine the meanings of terms and all sorts of other things to score political points.”

        I know what sort of economics that is, dude. And that ain’t think sort you’ll find on this blog. Sorry.

      • JakeS says:

        No, that’s not what I wrote.

        What I wrote was that you can of course use any tool you want on any problem you want, but if the tool is irrelevant to the problem, then your conclusion will be nonsense.

        And what tools are relevant is usually determined by the power relationships, because very nearly all economic causality flows from asymmetric power relationships. (The lack of even a language, much less any inclination, to discuss power is the reason neoclassicism is intellectually sterile.)

        – Jake

      • When I hear “power relations” being discussed in the context of macroeconomics I quickly become aware that what is being discussed is not macroeconomics at all. That is why I switch off.

        You and I are interested in different things, I’m afraid. And frankly I think my definitions will win out over your political posturing any day. But we’ll see.

      • JakeS says:


        You’re welcome to try to describe the material provisioning of society without reference to power and power imbalances. But you’re not going to get very far in terms of applicability to the real world.

        – Jake

      • Actually, you’re right. I really enjoyed that chapter on power relations in The General Theory. But it wasn’t quite as good as the one in Godley and Lavoie’s Monetary Economics.

        I think you’re doing something rather different than what I’m doing, bud. Which will go further? Well, we’ll see.

    • Giorgio says:

      “Some writers (such as Samuel Brittan and Sir Douglas Hague) have seriously suggested that EMU, by abolishing the balance of payments problem in its present form, would indeed abolish the problem, where it exists, of persistent failure to compete successfully in world markets. But as Professor Martin Feldstein pointed out in a major article in the Economist (13 June), this argument is very dangerously mistaken. If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.”

      • A “balance of payments problem” is not a “balance of payments crisis”. The former is a vague term that aptly describes one aspect of the EZ crisis; the latter has a firm and well-established meaning in economics. This is undergraduate level stuff.

  2. Ramanan says:

    Plus the terminologies are good.

    It is oft forgotten that more than problems for the exchange rate, the main adjustment to resolve balance of payments imbalances happens via adjustments in INCOME.

    I don’t know why MMTers are too insistent everyone talks their language.

  3. JakeS says:

    This interpretation rests on accepting that the Euro is a common currency. That is not true.

    If you examine the Eurozone institutions, you will find that the Euro functions like a specie currency: A group of independent fiscal authorities tied together by a commitment to using an external specie as money. That the Euro coins and notes come from the ECBuBa rather than a gold mine does not really matter to this discussion, because the ECBuBa has Austrian paranoid delusions embedded at its constitutional foundation. Institutionally it’s a recreation of the gold standard far more than it is a proper fiat currency.

    So what you’re seeing here is the same process at work as in the disintegration of a specie currency system. This has aspects of a currency crisis and aspects of a domestic macroeconomic crisis. And historically tends to cause shooting wars.

    – Jake

    • The Euro is not a common currency? Okay, sure buddy.

      I hope people see what happens when language is misused. All sorts of silliness comes out of the woodwork. People need to use terms clearly.

      • JakeS says:

        You’re too hung up on empty formalism.

        Formally speaking, the Euro is a common currency. Just like, formally speaking, the Queen of England can fire the British Prime Minister.

        In the actual reality of actual central bank and treasury operations, it works like a specie peg. And the fact that the specie comes from the good grace of the ECBuBa rather than the good grace of geological accident matters much less than you appear to think.

        – Jake

      • “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

      • JakeS says:

        Are you also of the opinion that Britain cannot have a constitutional crisis because it has no constitution?

        Because that’s basically the claim you’re making here with respect to the Eurozone.

        – Jake

      • Wrong. A constitutional crisis is not defined by a breakdown in the constitution per se. It also refers to a situation which “the legal systems… basic principles of operation appear unable to resolve” (from Wiki

        A BoP crisis, on the other hand, is defined in the way I lay out in the piece. See the update.

        Don’t play Humpty Dumpty with this. You’ll come off looking very silly indeed.

      • JakeS says:

        A BoP crisis is defined as “involv[ing] a shortage of reserves to cover balance of payments needs.” Or “when a nation is unable to pay for essential imports and/or service its debt repayments.”

        Which is obviously (at least to anybody who has been paying attention to how the ECBuBa actually operates at any point in the last three or four years) what is going on here. See, e.g. Sinn’s kvetching about Target2 balances, the ECBuBa’s threats to withhold clearing functions from debtor states and Art. 123A of the Consolidated Treaties, which forbids overdraft facilities for member states.

        You’re the one playing word games rather than engaging in serious institutional analysis. If you examine the power relationships in play, you will very quickly see that the Eurozone crisis bears a greater resemblance to a dollarized Latin American economy defaulting on its dollar peg than to an American muni defaulting on its pension scheme.

        – Jake

      • Stop that silly nonsense. The T2 account ensures that BoP crises don’t happen. That’s what it is set up to do.

        You and Sinn should get a room with your silly conspiracy theories about stealth bailouts. No one takes you people seriously. And I’m not surprised.

      • JakeS says:

        You, and Sinn, assume that Target2 will keep happening.

        If the Irish and Greek examples, wherein the ECBuBa threatened to crash the domestic banking system unless it got partisan concessions did not persuade you that this is a naive view of the power relationships at work in the Eurozone, then I would have thought that Cyprus should have disabused even the most persistent fan of meaningless formalism of such notions.

        I think I will bow out here, because I am rapidly running out of reasonably polite ways to explain why a little basic institutional analysis is more useful than stomping your feet and insisting that the world must conform to dictionary definitions. Definitions very often written by people who demonstrably don’t understand economics – even to the point where their advice inflicts seven-figure body counts.

        – Jake

    • Your comments are beginning more and more to display partisan political posturing and imaginary political scenarios rather than real analysis. That is probably why few will take it seriously. Sinn might like it though. You should look him up.

  4. Ramanan says:

    Can’t figure a way to reply to the latest comment directly below your point on “see update”

    First are you saying that current account deficits of any country can be indefinitely sustainable in the Euro Area? That is pure nonsense. One can think of a country sustaining a 2-3% deficit but this rising forever isn’t. In other words you cannot say it in an unqualified way.

    The Euro Area nations’ balance of payments were unsustainable and according to the “Macroeconomics Imbalance Scorecard”, CAB/IIP is one criteria.

    Second, the IMF thing you refer is a specific provision for a country needing foreign currency for its balance of payments need. It is not an all encompassing definition or whatever you make it out to be.

    At any rate the IMF was involved – countries facing issues didn’t have resources to borrow domestically (given Euro Area constraints) and needed foreign help. That way, a country such as Portugal is facing a balance of payments issue.

    Third that is a working paper.

    According to your referred dictionary link, a country needs finance from abroad and that is what is happening in the Euro Area.

    You confuse geography and currency.

    • “First are you saying that current account deficits of any country can be indefinitely sustainable in the Euro Area?”

      Of course. Provided the Target2 system stays in place. I think everyone realises this, to be honest.

      Regarding the definitions, I’m still waiting for your’s Ramanan. But I don’t think you’ll find them. Because its you that are using terms in idiosyncratic ways here. Not the MMTers. Sorry. That’s just a cold, hard fact.

      • JakeS says:

        Obviously breakdown of the Target2 system would be a part of a breakdown of the Eurozone under the weight of unsustainable political and economic trends *of any kind.* So holding up Target2 as an argument that imbalances can be sustained indefinitely is assuming your conclusion.

        Limiting the scope of your analysis to “so long as Target2 keeps existing” is not totally unlike limiting your scope to “so long as house prices keep going up.” Yeah, in principle they could keep doing that forever. In both cases, historical experience suggests that that trajectory will lose political consensus within the lifetime of mortgages signed today.

        – Jake

      • Thanks for that input on the political situation in Europe, JakeS. Next time I want to confuse political analysis for macroeconomic analysis I’ll be sure to look you up.

      • Ramanan says:

        That is just silly. If someone had written a paper before Keynes arguing about effective demand would you have said show me an encyclopedia. It is just stupid.

        “Of course. Provided the Target2 system stays in place. I think everyone realises this, to be honest.”

        No it is not because if current account deficits rise forever, a nation will become more and more indebted to foreigners who will get pissed off. In your ideal world you will continue financing them.

        The Target2 is a separate thing. Suppose capital continues to fly. At some point, the rest of the Eurosystem cannot offer overdrafts to the NCB of this country because the associated transaction between the local bank and this NCB will not be possible because the bank has no collateral to provide the NCB. In this case the country has to leave the Euro Area.

        This is the reason there is so much debate about the ELA. There are many debates one can have on the ELA but you are taking it to the extreme – implicitly.

      • The same could be said of US states then?

      • JakeS says:

        “The same could be said of US states then?”
        The US Fed does not, in practice, have the power to arbitrarily withdraw rediscount facilities from banks operating in individual states in order to extract partisan concessions. Likewise, the FDIC does not have the authority to arbitrarily exempt parts of the US from its jurisdiction, and the FDIC is (in practice) backstopped by the Fed or (inclusive) Treasury. So not under current American institutional arrangements, no.

        You will notice that the Eurozone does not have a common resolution structure like the FDIC, and that the ECBuBa acts as though it has discretionary authority to arbitrarily cease central banking activities in individual member states.

        Whether the ECBuBa is right about that will only be seen once a member state escalates rather than folds against Troika brinkmanship. And that hasn’t happened yet.

        But for the record, I’m betting “yes.”

        – Jake

      • This is what always happens. You start this argument and your interlocutor starts delving into legal and institutional aspects that have zero to do with the underlying macroeconomics.

        It’s really quite simple: If/When the ECB withdraws funding we will have a BoP crisis. Until then we do not. We do not need to look into our crystal balls (can I borrow your’s, I don’t have one) to get this right. If the ECB withdraws: BoP crisis. Until they do: no BoP crisis.

      • JakeS says:

        “This is what always happens. You start this argument and your interlocutor starts delving into legal and institutional aspects that have zero to do with the underlying macroeconomics.”
        Yeah, because there is such a thing as “macroeconomics” – “underlying” or otherwise – which has zero to do with the society’s institutions.

        *shrug* Whatever. I would submit that for the people actually experiencing the crisis in real time, the distinction between the time before and after the Troika imposes the first conditionalities is a difference in kind, while the difference between the time before and after the Troika pulls its credit line is a difference in degree. And in the case of Greece or Indonesia, a difference in degree which is barely measurable.

        – Jake

      • Don’t start your political stuff with me. It’s awfully patronising given that I’m an Irish ex-pat.

        The crisis being bad does not excuse a poor use of terms. I cannot start calling cats ‘dogs’ and then saying “Oh, it’s because of the unemployment rate in my home country!”

      • JakeS says:

        Well, excuse me for expecting that you have a substantive objection to go along with the terminological one.

        You claim that the debate in your initial quote stems from a poor understanding of terminology. Yet this is manifestly false. If we replace the term “balance of payment crisis” with “foreign debt crisis” the substance of the debate you quote remains: The “American” (sic) position is that intra-Eurozone trade and cash flows are domestic, while the “European” (sic) position is that they are foreign.

        Setting the debaters straight on the correct terminology does not, in this case, clarify any of the substantive points. I think this is the reason you meet with so much confusion – most people expect terminological corrections to be made when (and pretty much only when) the incorrect terminology causes substantive miscommunication.

        – Jake

      • It sure does. Because the two terms are synonyms. If we don’t have a BoP crisis we don’t have a foreign debt crisis.

        Just like if I hate canines I’m likely to not be very fond of dogs…

      • JakeS says:

        “If we don’t have a BoP crisis we don’t have a foreign debt crisis.”
        So Greece’s debts to German banks are not foreign? Or they are not causing a crisis?

        Or is “foreign debt crisis” another one of those terms, like “rational,” “expectations” and “equilibrium,” which, when used by certain sorts of economists, take a trip through a fun-house mirror? The one where they come out on the other side looking almost like the plain reading of the clear text to cursory inspection, but on closer examination meaning the complete opposite?

        – Jake

      • The term “foreign debt crisis” is poorly defined as you will quickly see if you do a Google on it. So, I’m not going to argue with your vague terminology. I now wish I hadn’t tried.

        The present crisis is not a BoP crisis. You won’t change my mind on that. And I won’t change your mind on it. So please, knock it off.

        If you must have the last word, go ahead. I have better things to do than attempt to tell someone who has some sunk intellectual capital in a poor use of terms to rethink how they are using said terms.

  5. Ramanan says:

    I’d say a balance of payments crisis is a crisis where balance of payments financing becomes difficult. So many Euro Area nations have a balance of payments financing problem because they are unable to borrow from foreigners.

    A balance of payments transaction is the one between a resident and a non-resident. It is irrelevant in which currency it is in. *If* you are a US resident and I pay you in dollars, even in person in New York it is a BoP transaction because I am not a resident of the US. So the currency is not relevant here or not important. The two parties and their residency statuses are.

    So Portugal has a balance of payments problem because it is unable to finance its debt from foreigners.

    It is true that the government is unable to do so from residents is also the case but even in countries facing currency issues, there is a problem where institutions are unable to borrow in local currency.

    Again a reminder – a BoP transaction is between residents and non-residents.

    • More idiosyncratic definitions. As I said to JakeS above:

      “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

      Just remember this next time you accuse MMTers of not sticking to definitions, Ramanan. Remember it well.

      • Ramanan says:

        A BoP transaction is between residents and non-residents. If there is any correct definition of a BoP crises, it would have to mean financing and refinancing issues with non-residents.

        Which is the case in the Euro Area.

      • I’m a resident of the EU, you know…

        Seriously, stop trying to make up your own definitions. It’s evasive and kind of weird.

    • Very good. Have I misused the term “money multiplier” somewhere? If I have kindly point to where and I will correct it ASAP.

    • Ramanan says:

      No just highlighting the fact that the the link you referred is not some source of ultimate gyaan and terminologies and concepts such as a nice book on car making.

      Plus I have given sufficient reasons for

  6. Ramanan says:

    It was an example – think of yourself as a US resident for a minute kinds.

    So your actual residency is not important to highlight the concept.

    If you don’t like the previous comment replace it with a random resident of New York.

    • Your examples, like your economics, are slippery. Redefine this and that and on and on it goes. I like things simple. And to keep things simple we keep to well-defined meanings. Otherwise we go meandering off into RamananLand. I’ll stay on this side of the fence thanks.

      • Ramanan says:

        This is really a minor point.

        I wasn’t sure of your residency, so the US. And you is not specifically you but sometimes people use “you” as in a third person.

        I don’t see why you have to take an issue about this.

  7. Benedict@Large says:

    Actually, it’s quite useful to think of he poverty in the neighborhood down the street as a balance of payments crisis, as doing so suggests the same solutions to the poverty as one would suggest for a BoP crisis. (Which is not to say that your complaint of overuse of the term doesn’t also have merit.)

  8. B says:

    Well, I must admit I have difficulties inferring that “You see, a BoP crisis requires that an entity has its own currency otherwise its not a BoP crisis.” from your sources.

    But first, “And no, articles by Krugman and Martin Wolf that use the wrong definition are not sources.” may be use arbitrarily by pretending that your opponents simply don’t have the “good” definition, which is apparently the one provided by wikipedia (a useful source of knowledge by the way, but not the only source of Truth).

    So, about the definition, wikipedia : “A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation’s currency.”
    But, what is here the BOP crisis? The first part of the definition (before “Typically”) or the entirety of it? What does it mean by “this is accompanied by…”? The BOP crisis is accompanied by or the two sentences are just one and the same phenomenon, a BOP crisis?

    On economicshelp, “The solution to a balance of payments crisis is usually to devalue the currency and slow down consumer spending on imports, usually by causing a recession.”
    So a devaluation is the solution to a BOP crisis. But does it mean that a BOP crisis REQUIRES that an entity has its own currency? Well, according to that definition, the solution to a BOP crisis seems to require that the entity has its own currency in order to devalue, but not that the BOP crisis cannot happen in the first place.

    On financial-dictionary, no direct mention of the currency. But one can infer from “That is, a balance of payments crisis occurs when so much money is flowing outside a country that it has difficulty borrowing to make up the difference.” that a downward pressure is put on the national currency. But according to this definition, nothing say that a country without its own currency cannot have difficulty borrowing to make up the difference between money inflows and outflows, which is what they explain being a BOP crisis.

    You are using here the couple “a rise in the current account deficit leading to pressure on a country’s currency.” as a definition of BOP crisis. But your sources, supposed to be evidences for it, are not clear-cut.

    • I’m not here to help you with reading comprehension. Here, I’ll give one example.

      From Economics.Help:

      This occurs when the current account deficit cannot be maintained.

      In the Eurozone a CA deficit can always be maintained because of the Target2 system. Go read the linked to paper that I’m criticising.

      Man, the comments on this post have been dumb.

      • Ramanan says:

        “In the Eurozone a CA deficit can always be maintained because of the Target2 system”


        First contrary to evidence.

        While there is an open line of credit between the NCBs and the rest of the Eurosystem, there is no such thing between banks and their NCB.

        If a bank loses deposits abroad, the bank becomes indebted to its NCB and needs to provide collateral in return. Banks do not have a treasure of collateral.

        This actually created a problem and had to go the ELA in many cases which cannot be used as per this blog author’s wishes. There is amount of negotiation in this and can be used more than what it is meant for but by no means can this be extrapolated.

        It requires a two-thirds majority of the ECB’s governing council.

        “Money” is not like that. Nein nein nein.

        Because if it were like that any country can abuse the system and import like crazy.

        Euro Area nations do not have an open line of credit with the rest of Euro Area.

      • B says:

        You should probably mention that in your original post. You are basing your argument here on the ” first” part of the definition, the CA deficit. In your post, you explicitly criticize the use of BOP crisis on the “second” part and the fact that a country has its own currency.

        What was your point? That a BOP crisis requires that an entity has its own currency, as you stated clearly in the original post, or that a BOP crisis cannot happen because of Target2 as you have just said?

        My comment may be dump, but you didn’t really answer. You switched to another argument.

      • @ B

        This blog presupposes a certain amount of prior education. If you are not familiar with these issues and need them spelled out to you in such a level of depth — i.e. if you need me to walk you through the MMT/Kaldorian debate step-by-step — then I suggest you take your comments elsewhere.

        @ Ramanan

        I’ll tell you what, Ramanan. We’ll wait until that “break” comes and then we’ll discuss whether it constitutes a BoP crisis or not. Until then, please stop butchering economic terminology. You complain when Keen does it to “aggregate demand” and then you go and do the same thing when it buttresses your arguments.

  9. Edmund Karner says:

    A balance of payments problem without one’s own currency…if I recall correctly, this is called “being poor”.

  10. Ramanan says:

    ” please stop butchering economic terminology”

    Oh whatever! I am not the one here butchering terminologies.

    About Keen – although not relevant here – aggregate demand is a short form for aggregate demand for goods and services. It does not suit a professional economist like him to make such sophomorish errors. It is an erroneous definition to begin with confusing the way of financing the purchase with the purchase itself.

  11. B says:

    Note that I did no refute the possibility for a country to run a CA deficit for a long time when it doesn’t possess its own currency. Historically, some countries have probably experienced that thanks to the dollar. Hence, I agree with your point.

    My comment just emphasized a possible reason for disagreements Given that you were dealing with an “appropriate” definition, I suggested that your sources are unclear, and don’t help to make the link between CA, BOP crisis and national currency. In addition, they seem to differ slightly in their definition of a BOP crisis, as I said in my first comment. Inasmuch as you were talking about appropriate definition, meaning, terminology, rigour in statements, I found that a little ironic. Well, obviously you did not. Probably my lack of education.

  12. Pablo says:

    Here are my sources: (this one actually stress the relative price issue, though they do mention fiscal transfers, with a Deutsche Bank bias but still reasonable) (everything in terms of “creditors” and “debtors”, entirely consistent with what I said about “don’t have or don’t generate enough foreign claims (usually, foreign currency) to pay for imports and debt servicing”) (page 63)
    Then, Keynes, CW Vol 25, p. 83, memo “Proposals for an International Currency Union”, dated December 15th of 1941: ““It is possible to combine countries, some of which will be in a debtor and some in a creditor position, into a Currency Union which, substantially, covers the world. But surely it is impossible, unless they have a common banking and economic system also, to combine them into a currency union not with, but against, the world as a whole. If other members of the sterling area have a favourable balance against the world as a whole, they will lose nothing by keeping them in bancor, which is universally acceptable, until they have occasion to use them. But if the sterling area is turned into a currency union, the members in credit would have to make a forced and non-liquid loan of their favourable balances to the members in debit.” The analogy of the problems of a currency union with the problems of a gold standard are clear, in my view (and nobody ever denied that the crises in the gold standard were a balance of payments problem). And by the way, if that useless game about “who called it first” is still going on, my vote goes for that memo.
    Having said all that, I think that this discussion about definitions is not useful either. We pretty much agree on the causes, we may have some disagreements about the solutions, depending on whether one wants to keep the Euro or not, but within each choice our suggestions are broadly similars, I believe.

    • These are papers that use incorrect definitions. They are not sources that contain definitions. I am surprised with the level of scholarship on here. I really am.

      Also, that Keynes quote says nothing about what a balance of payments crisis is. I am becoming increasingly disappointed with the responses on here. They are very evasive.

  13. Giorgio says:

    Of course, a Balance of Payment problem is not a BoP crisis, but a BoP crisis cannot be without a BoP problem, and a BoP problem can always lead to a BoP crisis. I don’t know if it’s undergraduate or not, but it could be logic.

    In fact, Target2 balances are not illimited, both for collateral requirements and political reasons.

  14. Pingback: Comentario a Garzón (2013) “El capitalismo español en el siglo XXI ¿Qué lugar en la economía mundial?” | Quina economia?

  15. SV says:

    Hey man,
    Hope this clears things up. Currency crises are not BoP crises even if Wikipedia says they are. BoP crises trigger currency crises which are eventually solved when the fixed exchange rate breaks down…except in the unique case of the Eurozone where countries share a single currency.

    • I assume that you noted the references. She’s a Krugmanite. Krugman has been making this error too, as have the likes of Martin Wolf. They’re redefining the term. See the intro to the piece linked:

      A balance of payments crisis typically arises when a country can’t finance its foreign transactions.

      In the EZ a country can ALWAYS finance its foreign transactions because of the TARGET2 clearing system. Despite what Krugman and one of his followers in the FRBSF think, an entity with a single currency cannot have a BoP crisis. Otherwise states in the US, even local governments and individual neighbourhoods would all be analysed in terms of BoP crises. That would be completely absurd.

      • SV says:

        You’re missing the point. The problem with the Eurozone is that countries have fiscal independence while sharing the same currency. This allows a BoP crisis to develop. Prior to the crisis, countries like Greece could finance fiscal deficits by issuing low-interest bonds (in essence, borrowing money cheaply) benefiting from the fact that they share a currency with Germany. A BoP crisis develops when Greece imports much more than they export and speculators deem it unable to pay its debt. Usually what happens is that speculators put downward pressure on the country’s currency in order for it to devalue so exports become cheaper (more competitive) and the country can sell its way out of the problem. In the case of the Eurozone, sharing a single currency (irrevocable commitment to an exchange rate), makes it unable for a currency crisis to develop and Greece is forced to undergo an internal devaluation (austerity).

        States, local governments and individual negihbourhoods cannot be compared to Greece. Again, the Eurozone is a unique situation as there is no other economic region that shares a monetary union without having a fiscal union.

        P.S: The Krugman (1979) paper cited on that website is a prestigious paper that outlines the First-Generation Model of currency crises. I understand Krugman may have strong opinions about certain subjects but this is a world renown paper that eventually got him the Nobel prize. And this model is widely accepted in economics as an explanation of Latin America’s sovereign debt crises in the 80s.

      • You write:

        A BoP crisis develops when Greece imports much more than they export and speculators deem it unable to pay its debt.

        I’m sorry, but you’re just redefining the meaning of a BoP crisis here. What you are referring to is a “sovereign debt crisis”. A BoP crisis is, as the author of the paper that you cited wrote before she descended into confusion:

        A balance of payments crisis typically arises when a country can’t finance its foreign transactions.

        You see the key term there? Foreign. It cannot finance its foreign transactions.

        Using your redefinition any currency-user would have a BoP crisis any time they went broke. Example: I run up lots of debt to buy a new kitchen for my house. Since the kitchen is an “import” to the geographical district known as “my house” I then say “Oh my God, I’m having a BoP crisis!” If you think that this is a correct use of the term “BoP crisis” then I am not going to convince you otherwise. I think that it is completely absurd and an abuse of language.

      • JakeS says:

        “In the EZ a country can ALWAYS finance its foreign transactions because of the TARGET2 clearing system.”
        Right up until it can’t.

        Just like a third-world country can always finance its currency operations at the IMF. Right up until it can’t.

        “You see the key term there? Foreign. It cannot finance its foreign transactions.”
        If you think that German imports into Greece are not “foreign trade” then you are operating with a highly non-standard view of the European Union. A view which has no basis in the Consolidated Treaties.

        A common currency is a necessary but very far from sufficient condition for being the same country.

        – Jake

      • First of all, I never said that German exports to Greece are not foreign trade. They absolutely are. So, let’s stick to what I actually said, shall we.

        Now, be very clear about what you’re talking about here, Jake. Because everything hinges on this.

        At what point exactly does the TARGET2 clearing system misfire and an EZ country become unable to meet the obligations on its external account?

      • JakeS says:

        “At what point exactly does the TARGET2 clearing system misfire and an EZ country become unable to meet the obligations on its external account?”
        When the ECB decides to terminate Eurosystem rediscount facilities to member banks. Or, what practically comes to the same thing, when the ECB ceases to accept sovereign issue as collateral against such rediscount facilities.

        Just like any other third-world country’s ability to clear its foreign account ends when the IMF decides to terminate its credit line.

        There is no cut-off point where this is automatic. If the political will exists to continue extending the credit line, then it can continue indefinitely. Conversely, however, if that political will dissipates it can happen at any moment.

        One may of course argue that the present European crisis only qualifies as a balance of payments crisis once the ECB is called on its extremist brinkmanship and actually pushes the button. I can’t really see a difference to go with that distinction, but maybe that’s because I’m a benighted ignorant.

        – Jake

      • Again… then we will have a BoP crisis. Right now? No BoP crisis.

        It’s quite simple. It’s just that so many people are dug in on this because they made a stupid mistake by using terminology in a sloppy manner.

  16. NeilW says:

    “In the EZ a country can ALWAYS finance its foreign transactions because of the TARGET2 clearing system”

    I think that puts the cart before the horse.

    Unless the finance arm of a transaction is in place, the real transaction simply doesn’t happen.

    Because TARGET2 exists, and because central banks in general exist, people are more inclined to trust that the finance arm is in place – and therefore you get more real transactions happening.

    I think this idea that there is a real transaction and then some time afterward there is a finance transaction is a mistaken model in the modern world.

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