FT Economist’s Illogical Conclusion

Why I remain a pessimist on Europe’s solvency – FT.com.

This is an interesting article from an economist I read whenever he has something to say. That is not to say that he is perfect and has made a mistake of logic in his latest article. He writes,

I consider the sovereigns of Spain, Ireland and the rest to be fundamentally solvent – minus the banks, of course. In the second category, I consider the private and financial sectors in Spain, Portugal and Ireland to be insolvent.

Spain, Ireland and Portugal are members of the notorious PIIGS. The author believes that their governments are solvent, but then states that these countries have insolvent private and financial sectors.

If a country’s consumers, businesses and financial institutions are insolvent, then it is insolvent, too. A country depends on these sectors to provide revenue to fund government operations. One of the problems facing Spain, Portugal and Ireland is that the private and financial sectors are no longer providing enough revenue to support the state. Hence, the state is insolvent..

Say you got a check up and the doctor told you that your heart and lungs were failing, but otherwise you were in good health. That is a similar claim to the author’s.

Until these countries make the necessary reforms and cut their debt to manageable levels, they will be insolvent.



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