One of the relatively unexplored aspects of the Greek debt crisis involves balance of payments issues that are buried beneath the terms of trade upon which Greece entered the European union. Much has been said and written about failure to pay taxes, excessively rich welfare state and excessive debt but very little about the terms of trade under which Germany and the northern countries benefitted considerably but Greece fell further behind. If your exports lag behind your imports something has to give to help pay the bill.

In the case of Greece current exports are 19 % of the GDP but imports are 31 % of the GDP.

If Greece were still a drachma currency with its own central bank the solution is straight forward. The drachma devalues, imports become more expensive and exports cheaper helping to right the balance over time. But if you have had the misfortune of entering into a currency union at the wrong and overvalued exchange rate you suffer from a fixed in stone disadvantage that can only be corrected through deflation of your wages and reduction of your export prices and wherever possible through productivity improvements that cheapen the relative price of your exports.

Because you now lack a central bank you are also at the mercy of your trade balance . To the extent you pay out more of your currency to your trade partners than they return to you in buying your goods, there is a built in tendency to reduce the supply of your currency. Unless you dramatically increase the velocity of circulation of the currency that remains there is a built in tendency to shrink your GDP.

In such circumstances austerity is precisely the worst policy you can opt for unless you wish try to solve the problem through a major fall in real wages, with all the deprivation and turmoil that will cause. This resulting deflation and recession leads to growing unemployment and growing indebtedness, In a strange sort of way a currency union that operates without a proper central bank has recreated the disaster of the gold standard that through its rigidity helped bring about the great depression of the 1930s.

The problems of balance of payments and the crises they can provoke do not disappear with a common currency but are submerged to re-emerge as a sovereign debt crisis.