Most people think of the eurozone crisis as a fiscal crisis. They see the southern European countries collectively called the PIIGS (Portugal, Ireland, Italy, Greece and Spain) with huge debt/GDP ratios or huge fiscal deficits that look unsustainable, and require rescues by prudent northern Europeans. This is true, but masks a much bigger picture. This is that the private sector in the PIIGS is as indebted and insolvent as the government, reflected in huge, growing current account deficits. For viability, private overspending needs to be tackled no less than public. A 10-year wage freeze (leading to a terrible depression) might do the job, but looks politically impossible. Economists like Martin Wolf argue that the eurozone crisis is at heart not fiscal at all but a balance of payments crisis. Wolf looks at fiscal deficits in the eurozone between 1999 and 2007 and finds that the biggest deficits are not in the PIIGS. He then looks at countries with the highest debt/GDP ratios, and once again finds that PIIGS do not monopolise this list. Next he looks at the countries with the highest trade deficits. These are, overwhelmingly, the PIIGS. So, Wolf argues, this is a balance-of-payments crisis cloaked as a fiscal one. Why has this not been highlighted much earlier by many others? Because the main deficits of the PIIGS are overwhelmingly with Germany. The eurozone as a whole has a negligible trade deficit. The big deficits are those of the PIIGS within the eurozone. Had the PIIGS run up massive deficits with the rest of the world, everybody would have known. But deficits within the eurozone are paid for not in foreign exchange but in euros, which happen to be the domestic currency too. So, these deficits have escaped public attention. Analagously, the trade deficit between Texas and California is also in the same domestic currency, and also escapes public attention. However, a big academic debate has now broken out on what are called the balances in TARGET2 (the inter-European banking mechanism for transfers in euros between eurozone members). A paper by Prof Hans-Werner Sinn of the IFO Institute, Munich, shows that Germany (along with Holland and Finland) had accumulated TARGET2 surpluses of over 400 billion euros by August 2011, with the PIIGS accumulating a corresponding deficit. By today, the figure must be well over 500 billion euros, bigger than even the 440 billion euros of the EFSF (the European rescue fund). Martin Wolf interprets this to mean that the national central banks (like the Bank of Greece) are able to print euros to finance their countries' current account deficits. This amounts to a painless monetisation. And so, Wolf argues, the eurozone is already a transfer state, transferring automatically money from the surplus to deficit countries. Others disagree. Some say that the balances are IOUs, not transfers, and will need to be repaid in due course. However, the imbalances are so large that they cannot be repaid in the foreseeable future. Some economists argue that in a monetary union, such deficits can continue indefinitely, like deficits between Texas and Mississippi in the US. Economist Willem Buiter of Citibank points out that the TARGET 2 surpluses of Germany may represent not just trade deficits but also capital flight from the PIIGS to

Germans may have to sacrifice even more through unpaid TARGET2 balances. further sacrifices to rescue the PIIGS. But if this results in the PIIGS leaving the eurozone. devalue and make a fresh start. adjusted for the business cycle. or back to national currencies again. and for Germany to make sacrifices to keep them in.5% of GDP. Like me.Germany. Any eurozone break-up will create horrendous problems. German voters oppose. limiting future fiscal deficits in all countries to 0. This is not so different from the original Maastricht Treaty. Maybe the competitive countries of northern Europe will exit to form a supereurozone. We need more clarity on the ability of the national central banks of the PIIGS to print euros. . What will happen to TARET2 imbalances after a break-up? Probably the deficit states will refuse to pay. with bank depositors seeking safe havens. So. If so. worthless TARGET2 credits. Interested readers can follow this debate in Martin Wolf's blog in the Financial Times. sceptics feel the eurozone is no closer to solving the problem of how to maintain a single currency for countries with very different levels of competitiveness. European politicians have pledged to sign a fiscal stability pact. with much outrage. Right now. this is one more incentive for the PIIGS to leave the eurozone. leaving Germany with massive. which set a fiscal ceiling of 3% of GDP that was broken by everybody (including Germany). and is not a staple of everyday media discussion. The big debate in Europe bypasses this altogether. Amazingly. But it will enable the PIIGS to default on their massive official debts. Adjusting the fiscal deficit in any year to the business cycle is a very inexact and fudgable exercise. this debate is occurring in an academic ivory tower. but there will be light at the end of the tunnel. they will be amazed that such an important debate can escape mainstream discussion. Maybe the PIIGS will exit into a lower-level eurozone. They will go through a horrendous transition period. like Greece and Germany. Many believe the eurozone will break up.

with the MGNREGA being the motivator. While this factor could be at play at the margin. Various products have then been grouped under different ministries that oversee their operations. the agriculture ministry has to review its policy of minimum support prices (MSP). non-fuel manufactured products over which the RBI has control. which actually makes us work on a delicate three-dimensional trade-off: higher prices. Globally. The excuse that the poor were less poor and eating more was used to show that inflation was due to prosperity. The major cause of price increase has been noted so that the respective body can address price issue. While production has increased for cereals and to a certain extent in pulses. Around 11% of inflation has resulted from this factor. The MSPs have been increased relentlessly by the Commission on Agricultural Costs and Prices (CACP) to reward farmers. First. the rupee has depreciated. One way to tackle this issue is to actually analyse threadbare the mechanics of inflation. likely to be replicated this year. The highest share has come from the socalled core sector: non-food. nullifying those gains. which today is the RBI. around 40% of inflation may be attributed to possible demand-pull pressures. . the weighted change in the overall WPI and individual products has been calculated. But we need to know how this inflation has come to tackle it appropriately. The answer seems to be a shrug. it has not been decisive and is no longer harped on. which has not worked quite the way it was expected to. To calculate the contribution of various sectors to inflation. This is so because inflation combat has to be a joint action from various ends and cannot be the sole responsibility of one agency.INFLATION First we were in denial about inflation: the supply-shock explanation fell flat with very good production numbers in FY2011. it has had the tendency to increase benchmark prices in the market resulting in higher inflation. prices of metals have started declining. The accompanying table provides the contribution of various products to inflation along with the ministry or agency responsible. We can see that there are various arms of the government that should take some responsibility for inflation. While global prices have come down. but we have not seen that in India. The RBI is firing away at inflation with a relentless policy of rate hikes. Second. There are multiple factors that have contributed to inflation. fiscal deficit and health of oil marketing companies. So. the ministries of petroleum and finance have tried to align the prices of petroleum products to the market.

against 0. Pulses prices were 14. According to the official data released today. onion prices were lower steeply by 75. It was above 16 per cent in the corresponding week of 2011.64 per cent year-on-year.DECREASE IN INFLATION NEW DELHI: Food inflation remained in the negative zone for the third straight week. Egg. Food inflation. at (-)0.48 per cent. along with moderation in headline inflation during December 2011. Overall.47 per cent during the week ended January 7.57 per cent. Other food products. Fruits also became 10. became more expensive on an annual basis. mainly due to fall in prices of onion and vegetables.42 per cent for the week ended January 7.26 per cent.81 per cent cheaper during the week under review than in the same period last year. while potato prices were down by 23.27 per cent higher during the week under review. vegetables were 45. Experts feel that the decline in food inflation. meat and fish prices were up 19. Primary articles have over 20 per cent weight in the wholesale price index. while milk grew dearer by 11.42 per cent year-onyear during the week under review.90 per cent in the previous week. . will be a major incentive for the Reserve Bank to look at the option of cuts in key interest rates in the near future. while cereal prices were up 2. was at (-) 2. as measured by the Wholesale Price Index (WPI). Prices of wheat also fell by 3. led by protein-based items.03 per cent more expensive on an annual basis.84 per cent.51 per cent in the previous week. inflation in the overall primary articles category stood at 2.