TABLE OF CONTENTS
2 The balance of trade within the Members of the European Union
2.1 Problems with the management of the European Integration
2.2 Trade imbalances
3 Literature review
3.1 The financial markets integration and the intertemporal approach
3.2 The competitiveness approach
3.3 Labor and product market flexibility
4 The empirical investigation
4.1 Assessing the main determinants
4.2 Data gathering
5 Policy implications in the European framework
5.1 Interpretation of the results
5.2 The Maastricht treaty and the optimal currency area theory
5.3 The euroarea: ex-ante and ex-post considerations
In 2009, the GDP of the European Union decreased, in percentage terms, 4,4%, while the young unemployment rate increased from 14,1% to 18,3%, and nowadays it is around 20,2% (Eurostat1 ).On the other hand, the respondents to the Eurobarometer2 survey that believe that the European Union is an useful institution decreased, on average, from 48% to 40% in 2009, and it reached the lowest level in 2012, when it was established around 30%. The European election in 2014 has confirmed this trend, indeed political parties disapproving the European Union have increased their participation in the European parliament.
This data clearly shows how the economic crisis in 2009 had a negative impact overall in all the European Union. The crisis reduced not only the employment rate, but dramatically increased the difficulties for young people to enter in the labor market. The public opinion reacted badly to the inability of the European policy makers of implementing policies that would have boosted the growth, and peripheral countries, like Greece, Spain, Portugal, Italy, Ireland suffered the highest cost of the crisis. Overall, the economic crisis have been raising contrasts between the Member States, disturbing the peace and integration process started in Europe in the 1952.
The public debate about the economic crisis was based on cultural and financial aspects. For instance, some observers pointed out how prodigals are the Greek citizen, and how German citizen are hard working and money savers. This kind of cultural debate totally misses the economic factors in role during the European unification, and it exacerbates the tensions between the European Members. About the financial aspects, criticism hinges on the creation of the common currency, the over liberalization of the banking system, and other related observations.
Once the sharp financial reaction occurs, institutional deficiencies will be evident. Thus, after a crisis, it will be always be possible to construct plausible arguments – by emphasizing the trigger events or institutional flaws – that accidents, mistakes, or easily correctible shortcomings were responsible for the disaster. (Minsky, 1982)
Therefore, it is important to analyze the European crisis in a deeper level, without referring to cultural arguments or populist propaganda. At a first glance, an observer could argue that the crisis occurred because the peripheral countries of Europe continuously increased their public debt over the GDP, and, at certain point, the financial agents could not be confident anymore about the solvency of those countries. Hence, as a classic sovereign debt crisis, the cost for refinancing the public debt increased to unsustainable levels, various governments tried to raise the level of taxes in order to decrease the external deficit, consumption and investments lowered, leading to a recession that made even worse the weight of the public debt over the GDP. This is the typical succession of events during a sovereign debt crisis, and that occurred also in Europe, where countries as Greece had to renegotiate their debt with the creditors, and other Members from European Union, the International Monetary Fund and the European Central Bank had to try, through loans and other instruments, to rescue Greece from bankruptcy.
Triggered by the downgrading of rating agencies, risk premium demanded by holders of public debt have increased. The ten-year sovereign yield spread for bonds issued by surplus and deficit countries widened up to 250 base points. Costs of risk insurance have risen from 3 to 10 percent for Greek government bonds over the course of 2010, as measured by credit default swaps. The euro area members as well as the IMF stepped in as a lender of last resort to ensure further access to credit, conditional on the implementation of austerity reforms to consolidate the public budget. To avoid contagion to other countries and additional distortions in the transmission of the common monetary policy, the ECB started to purchase government bonds of the debtor countries. (Belke and Dreger, 2011)
Two main questions arise from the European economic crisis, that are going to be the main topics of this essay. First, an observer could argue that governments of the peripheral countries have guiltily increased their debt over reasonable levels, taking advantage of the over confidence of the financial investors after the creation of the common currency. Those countries could not, after the introduction of the euro, devaluate their own currencies against the German currency for correcting structural unbalances, therefore a sovereign debt crisis was unavoidable. Is this one the only reason for the European financial crisis? The aim of this essay is to try to show that the economic crisis was developed not only by prodigal attitudes of Southern European governments, but there could be other reasons about the spreading of the financial crisis in Europe. In the Europe Union there have been in place persistent pair to pair trade imbalances between peripheral European countries and Germany. Overall Germany experienced extremely positive balance of trade versus negative balances of trade in co respective countries as Greece, Spain, Italy and Portugal. Intuitively, a negative balance of trade means that a country is importing capital, however those movements of capital could be a natural consequence of under consumption policies implemented in Germany aiming to increase saving in order to have a positive balance of trade and low unemployment. If Southern European countries had to absorb excessive saving from Germany, the deficit of those countries, the house bubble in Spain and the over consumption in Greece can also be a natural consequence of excessive saving in Germany that decreased the interest rates paid by peripheral countries, and not only a prodigal attitude of Southern European governments. Symmetrically, the importing of foreigner demand of goods can explain the extreme low unemployment rate in Germany (Pettis, 2014). Moreover, capital movements and related imbalances could have been caused by private market dynamics, and not prodigals attitudes of governments, for instance a surge in the credit delivered to the housing sector, as it happened in Spain and Ireland.
A second question could arise about the management of the financial crisis in Europe. It can be argued that the European Union has not implemented the best policies in order to reverse the economic growth from negative to positive. The Maastricht treaty did not work in the way policy makers were expecting, structural imbalances have been persistent in the euroarea before the European sovereign debt crisis. Thereby, after a careful analysis of the imbalances of trade, new policy suggestions can be arisen.
Therefore this essay tries to explore these claims, and it develops as follow. The next section introduces the trend of the balance of trade within the European Members, together with some policy implications. After that, the third section describes the relevant literature to this topic. The fourth section develops some theoretical implications that are tested in an empirical framework. The fifth section describes some policy suggestions and the sixth concludes.
2 THE BALANCE OF TRADE BETWEEN MEMBERS OF THE EUROPEAN UNION
2.1 PROBLEMS WITH THE MANAGEMENT OF THE EUROPEAN INTEGRATION
The European integration has forced the participating countries to open completely their market to other members of the European Union (EU). In other words, it has been established free movement of people, capital and goods. Strict regulations have been applied in order to create a common market of goods. For instance, a common regulatory technical framework has been imposed for the production of goods in Europe, and every country has to follow those rules. In other words, every product needs to be manufactured following the guideline imposed by the European regulations. Therefore, at the border the authorities cannot stop anymore goods that come from another Member of the EU in order to check if those products have been manufactured following the right norms on safety. This imposition has been increasing considerably the speed of trade exchanges between countries in the EU. On the other hand, strict regulations have been introduced in order to avoid that firms could be subsidized or protected, directly or indirectly, by governments. Thus, every firm in the EU is competing against each other on the same level, without taking advantage of any kind of external help or “soft regulation”. The creation of a common currency for several countries participating in the EU has further boosted the integration process, removing the risk of exchange rate movements for firms that export abroad.
However, the integration process has introduced many challenges to the management of the European integration. First of all, an integrated market of capital could boost expectations, that maybe cannot be realized, about the potential economic growth of Members of the EU. For instance, a country that has a low GDP per capita, or with a lower endowment of capital, could attract a lot of resources, since investors could expect that this country will catch up with the richest countries of EU (Blanchard and Giavazzi, 2002). Therefore, an expectation of a greater return on investments in a peripheral country of Europe could simply be fueled by an over estimation of its future prospects. Without any kind of protection or regulation about the movements of capital, those expectations could be harmful for a poorer or prodigal country (Siena, 2014).
Those movements of capital could, therefore, fuel structural unbalances for a long period of time. For instance, if a country like Greece has a chronic negative balance of trade, and a competitiveness gap with countries as Austria, Germany or Netherland, those speculative transfers of resources could finance for a long period of time a negative balance of trade or external deficits. Thereby, the cost for rebalancing could be much higher afterwards, when suddenly the crisis occurs, and capital flies away. Indeed, it is not possible anymore, after the introduction of the euro, for countries as Greece, Portugal or Spain to devaluate their own currency against the countries that have a positive balance of trade.
The creation of a common currency generated another problem that is important to highlight. Before the sovereign debt crisis, peripheral countries necessitated a different interest rate from the one established by the European Central Bank, in particular much higher. Nechio (2011) shows that applying the Taylor rule for monetary policy, the European Central Bank was trying to apply an interest rate that fits the EU as a whole. However, an independent monetary policy for every country of EU could have slowed down the worsening of structural unbalances between European Members3. After the crisis occurred, the same problem is proposed again, but in the opposite direction.
Peripheral countries, for gaining again competitiveness, they need an inflation level that is lower than the German growth of consumer prices. Their products would, therefore, become cheaper every year compared to the German ones, and a little bit of competitiveness would be recovered. However, the inflation in countries as Germany is already low, because of prudential macroeconomics policies, with restraints on consumption and wages growth, in order to maintain a positive balance of trade and low unemployment (Zemanek, Belke and Schnabl, 2010). Without a reversal of the balance of trade between peripheral and central countries, and with those policies in place that highlight a lack of coordination within European Members, the crisis can be prolonged and achieve a new negative equilibrium, where all countries implement recessive policies on consumption and investments in order to achieve a positive balance of trade within each other (Pettis, 2013).
In order to reverse the balance of trade, the peripheral countries could, in correlation with competitiveness gains, implement policies for wage austerity, however is well known that workers are not willing to decrease their salaries, at least the ones that already have a job. Those labor market rigidities have a double bad effect: an increase of the unemployment rate, especially among people that do not have a job yet, therefore a relevant increase in the rate of unemployment among young people, and the prolongation of the structural trade imbalances between Members of the EU. On the other hand, a labor market that is not flexible could slow down the speed which workers can be reallocated from sectors that are suffering the international competition to sectors that are at the top of the competitiveness in the international market. Higher social protections for unemployed could also reduce the level of labor mobility across sectors. Those rigidities can increase the unemployment level in one country, but can also make more onerous the adjustment of the balance of trade in countries that suffer a gap of competitiveness.
Another feature that has been usually underestimated about the creation of the common market in the EU is the effect that this one had on firms that are based outside the EU. Intuitively, a firm that is based outside EU should afford every time the custom duty to EU. However, after the establishment of a common market, foreigner firms typically located a subsidiary in one Member of the EU, and from there they can serve all the European market without paying any kind of custom duty. Those firms usually have been locating in one country where is very cheap to invest, for instance where the taxes on earnings are low, or where the labor is cheap, or where the labor is high qualified. From this country they usually export in all over the EU, therefore this feature could worsen the imbalances of trade between European Members, especially when countries implement specific policies for attracting foreign direct investment.
Another relevant problem is the mobility of labor among European countries. Since European countries speak different languages, there is not a mobile labor market, therefore workers from poorer countries with high level of unemployment don’t move sufficiently to the richer countries with higher level of employment. Thus, the readjustment of the imbalances of trade is slowed down, and, more importantly, the factor price equalization process is delayed, or even interrupted, and unemployment persist in peripheral countries. A desirable solution, that cannot be applied in Europe, since EU is not a political union, would be the implementation of fiscal transfers to countries that suffer, simultaneously, high level of unemployment, fiscal deficit and negative balances of trade, from the ones that don’t face an economic crisis.
2.2 TRADE IMBALANCES
The main problem, however, in the European framework is the persistent combination of imbalances of trade between European Members. A continuous combination of imbalance of trade can affect, negatively, the unemployment rate and the debt level. First of all, in a currency union where the labor mobility is very low, therefore workers don’t move in countries where the employment rate is higher, a country that is always importing more than exporting could suffer of high unemployment rates. This a natural consequence because the rate of the internal demand of that specific country that is requesting foreigner products is too high. This could be related to price decisions, or quality decisions, if products from abroad have higher contents of technology. Buying from abroad means that local firms have not enough orders, in the case exports are not adequate, therefore they are forced to employ fewer local workers4.
On the other hand, a persistent negative balance of trade means that the country is importing capital from abroad, leading to a massive accumulation of foreign debt, thereby raising concerns into its creditworthiness. Those capitals could fuel the debt level, however, for repaying them, the governments need to reverse the balance of trade, or they necessitate to use those capitals in investments that will give higher returns than the cost for refinancing the debt. Overall, if those investments give higher returns, it follows that the GDP will grow5, reducing the real debt. Nevertheless, the main focus is about the balance of trade, indeed when the income of the residents is increasing, it also follows that a part of the additional income will be saved. On the other hand, if the consumption is remaining constant, it follows that the additional production is being exported abroad. Overall, every of those effects increases the level of saving, and if investments don’t continuously increase more than savings, it means that a certain point the balance of trade has to improve6. From a competitiveness approach, higher returns could be a consequence of an increase in productivity that improves the international competitiveness of local firms, for instance they can produce the same goods at a lower cost, thus improving the balance of trade.
However, in the peripheral countries, those capitals have mainly boost the consumption, therefore they have not been using for projects with higher returns. Peripheral countries did not improve their productivity or increase the return on investments. There has been some growth of the GDP, but that was only a consequence of higher consumption levels pulled by the net import of capitals (Greece and Portugal) or house bubbles (Spain and Ireland). Therefore, without improvements on the returns of the investments, there cannot be a reversal of the trade imbalances, hence it is problematic to repay the debt. Moreover, there has not been, in the EU, the so called “cold shower” effect when the common market has been established (Pelkmans, 2006). Observers indeed expected that countries with a productivity gap, after the removal of the custom duty, would have improved their productivities and converged to the richest countries. This should have been the case because firms that were still competitive in the internal market against foreigner firms due to the custom duty, after its removal they would have been crowded out from the market. A more competitive market, therefore, would have forced less productive firms to leave the market7, or to improve their productivities for being still competitive against foreigner firms (cold shower effect). This mechanism has not properly worked in Europe, and poorer countries have delayed the structural reforms as well, and no process of convergence in competitiveness has been observed. Moreover, peripheral countries export products with high content of labor, instead of technology, therefore over the time they lost competitiveness against countries that export products to EU and have a cheaper labor market, for instance China.
Most likely the over confidence of the investors, that believed that this process would have taken place, has delayed the need for those countries of catching up with the richest countries of the EU. Reforms and investments on innovation that could have boosted productivity have been delayed and nowadays the adjustments are even more costly. It is not even possible for the peripheral countries, in order to decrease the costs of those adjustments, to devaluate. Moreover, since the political and geographical configuration of the European integration, there is not enough mobility of labor or fiscal transfers between European Members,. It could be desirable, but it is unlikely to happen in Europe because of prudential and export led policies in Germany, that an increase in the consumption in Germany would improve the bilateral trade of peripheral countries against Germany. In this case, it would automatically worsen the balance of trade of Germany, that has a positive balance, and improve the one of peripheral countries that have a negative balance (Pettis, 2014). What is left, in this projection, is the implementation in the peripheral countries of the EU of recessive macroeconomic policies. For instance, by lowering the consumption level, the saving need automatically to increase, because fewer production is consumed domestically, however that would lead to a worsening of the unemployment rate8.
Therefore, as described above, the management of the imbalances of trade within Members of the EU is a complex matter that need a careful analysis. Before describing in the next section the main literature related to the imbalances of trade in the European context, it is however useful to observe the evolution of the imbalances of trade within the European Members before the sovereign debt crisis. Observer point out that countries have systematically diverged from 1995-1996, with peripheral countries worsening their balance of trade against countries as Germany and Austria (Zemanek, Belke and Schnabl, 2010) (Berger and Nitsch, 2010). However, the data confirm that Germany is the country that had the best bilateral trades versus peripheral country. For instance Italy increased its trade deficit with Germany by a factor of 5 within a decade, exceeding a few times its overall deficit in external trade (Canale and Marani, 2014).
The data proposed in the empirical section of this work is a panel data from 2002 to 2013. In the following table (Figure 1) are displayed the net exports of Germany from 2002 to 2007 versus countries as Italy, Greece, Spain and Portugal9. It is straightforward to notice that the net exports of Germany increased, and, reversely, that the balance of trade of peripheral countries got worse over the time.
Figure 1. Evolution of the net exports of Germany versus selected countries10
illustration not visible in this excerpt
3 LITERATURE REVIEW
3.1 THE FINANCIAL MARKETS INTEGRATION AND THE INTERTEMPORAL APPROACH
The first signal of concern about structural trade imbalances is provided by Blanchard and Giavazzi (2002). In their work, they observe that Portugal and Greece were, in 2000-2001, respectively, recording a current account deficit11 of 10 and 7 percent of their GDP. They argue that, since Portugal and Greece were, in 2002, the two poorest members of the European Union, what was occurring was a natural consequence of the greater integration of goods and financial markets in the EU. Since Portugal and Greece were the poorest countries of the EU, they were the countries with higher expected rates of return, therefore they would have registered an increase in investment. Moreover, since they were the countries with better growth prospects, they would have also recorded a decrease in saving, because households would have been expecting an increase in their permanent income, thereby starting to consumer more. Thus, poorer countries are expected to run larger current account deficits, however, symmetrically, richer countries are expected to run larger current account surpluses, since they would not invest saving domestically, but abroad where the returns are expected to be higher.
Blanchard and Giavazzi demonstrate, through a panel data from countries participating in the Organization for Economic Cooperation and Development (OECD) that saving rather than investment is the main channel through which integration affects current account balances. They conclude that, in Portugal and Greece, lower private saving, due to both internal and external financial market liberalization but also to better future growth prospects, and, to a lesser extent, higher investment, appear to be the main drivers of the larger current account deficits. Thereby, they suggest that countries such as Portugal and Greece should not take measures to reduce their deficits.
The idea of Blanchard and Giavazzi, and what also investors expected, was based on the assumption that countries as Greece and Portugal would have, within a couple of years, increased their GDP, thus automatically their saving12, thereby improving their balance of trade, assuming that investments are constant. This optimistic view, in the beginning of the 2000’, as shown in Figure 2, lowered the interest rates in the peripheral countries, fueling what was likely not a natural process, but a structural imbalance in the euro area.
Figure 2: 10-years governments bonds interest rate of selected countries
illustration not visible in this excerpt
The previous view is in line with the intertemporal approach to the current account. The intertemporal approach implies that countries with lower per capita income may attract foreign capital due to higher growth perspectives. They should consume more and save less in anticipation of higher permanent income. Investments are expected to exceed savings, implying external deficits in the catching up period. Similarly, richer countries tend to run current account surpluses (Gourinchas and Rey, 2007). Ca'Zorzi and Rubaszek (2012) confirm that the intertemporal current account model can describe quite well the pre-financial crisis dispersion of the current account and saving rates. They argue that consumption smoothing, based on expectations of economic convergence and free access to capital markets, was the main force driving the current account of the euro area countries, while capital accumulation played a less pronounced role.
However, different per capita incomes do not imply that the extent of borrowing that actually took place has been optimal, actually it could have been the opposite (Jaumotte and Sodsriwibon, 2010). In the long run higher net foreign debt positions need to be serviced by future net exports or a reduction of the debt. Growth must be driven by an adequate increase of the country’s production capacity of traded goods and services. Giavazzi and Spaventa (2010), by examining the composition of output and demand, find that has not been the case in the peripheral countries under consideration and argue that the monetary union has helped to relax the necessary discipline. The common monetary policy moreover did nothing to prevent an extraordinary growth of credit that fed the imbalances in peripheral countries. The intertemporal mechanism might also not work at all when countries borrow capital to finance the production of non-tradables goods. Indeed, borrowing implies that resources are used in a way that the intertemporal budget constraint is satisfied, with future positive net exports matching today’s incurred liabilities. For this to happen, the country must use at least some of the resources it borrows to enhance its potential in the production of goods that can be exported. However, if foreign borrowing is invested to increase the production of goods that cannot be exported (non-tradables), these goods are automatically consumed domestically, therefore the foreign financing of their production is equivalent to a borrowing from abroad for consumption purposes. The increase of the construction sector in countries as Spain and Ireland, fueled by an excessive credit expansion derived from net import of capital from abroad, provides evidence that the latter effect may have dominated (Giavazzi and Spaventa, 2010).
The link between capital flows within EU members and trade balances is further analyzed by Siena (2014). First of all, Siena claims that significant flows of capital and diverging current account balances have characterized the countries that are part of the common currency since the formation of the European Monetary Union. Starting in the 1990’, especially during the second part, peripheral countries, such as Ireland, Portugal, Spain and Italy accumulated increasing current account deficits. Other countries, instead, such as Germany, Austria and Netherlands started to run surpluses. Siena, however, does not focus only on the current account imbalances, but he tries to understand which factors, before the sovereign debt crisis, have established in the peripheral countries, simultaneously, negative trade imbalances, real exchange rate appreciation and output growth. In particular, he claims that expectations are crucial drivers of the international trade, especially anticipated shocks. Indeed, international trade is affected by intertemporal decisions about saving, investment and expected future income that influences the consumption. Siena proves that anticipated international yield spread shocks are the main drivers of the euro area periphery current account imbalances. Thus, after the creation of the common currency, the financial agents were expecting a shock on the yield spread, and this could have had a huge effect on the peripheral countries. Siena claims that international yield spread drops are the only sources that can generate the simultaneous observed dynamics of current account, real exchange rate appreciation and output growth in the peripheral countries. In contrast, anticipated productivity shocks fail to generate an appreciation of the real exchange rate.
The role played by the financial market integration in the EU is further explored by another paper of Schmitz and Von Hagen (2011). They first highlight the role that the monetary union could have had on deepening the financial market integration. They argue that after the introduction of the EMU and the common currency, financial markets became more transparent and transaction costs diminished. Moreover, permanent restrictions on domestic monetary policy, followed after the introduction of the ECB, can increase sovereign borrower’s credibility in international financial markets and consequently increase a country’s international financial integration (Arellano and Heathcote, 2010). Schmitz and Von Hagen prove that the introduction of the euro has, therefore, led to a significant increase in cross border asset holdings, hence leading to larger current account balances. They argue that capital flows in Europe are influenced by the different capital endowments of the European economies. After the start of the monetary union this tendency has become stronger for flows within the euroarea. The monetary union has, indeed, facilitated the allocation of capitals by promoting financial integration and reducing costs after the removal of the exchange rate risk. Some countries experienced lower real interest rates, and the decline might have fostered investment booms and saving busts. However, this can increase the persistence of deficits as lower income countries have improved access to external financing. Schmitz and Von Hagen interpret those signals as a sign of the proper functioning of the integration process, highlighted by a more efficient financial market that allocates better the resources, and not as an indication of an improper macroeconomic management.
On the other hand, a lot of observers believe the opposite. The euro generated problems difficult to manage, especially regarding the balances of trade within the EU.
The lack of an adjustable nominal exchange rate supposedly poses a problem within a currency union that also operates a single and unrestricted market for goods and services, such as the euro area. In this case, the permanently fixed nominal exchange rate forces real exchange rate adjustment through relative price levels alone, which can be difficult in the presence of rigidities in national goods and labor markets. (Berger and Nitsch, 2010)
1 The Eurostat is the statistical office of the European Union. Its task is to provide the European Union with statistics at European level that enable comparisons between countries and regions (http://ec.europa.eu/eurostat/data/database)
2 The Eurobarometer is a survey that measures, annually, the evolution of the public opinion about the European Union in the Member countries. The survey is run by the European Commission, and it helps to develop better policies in favor of the European citizen (http://ec.europa.eu/public_opinion/index_en.htm)
3 For instance, an higher interest rate in Spain would have reduced the credit boom that fueled the consumption and the house bubble.
4 However, that has not to be always the case, especially when the domestic demand is already adequate, and the trade deficit is just temporary and it is used for borrowing resources that are going to increase the productivity, therefore improving the balance of trade of that country.
5 Assuming, however, that other components of the GDP, as consumption, remain constant or don’t decrease.
6 It is important to remind, at this point, that the balance of trade is simply the difference between saving and investment. Therefore, every factor that affects saving and/or investment is also automatically affecting the balance of trade.
7 In order to increase the productivity of one country, it is already a sufficient condition that the last productive firms leave the market, since the average of the productivities of the remaining firms is going to be higher.
8 As mentioned before, if every peripheral country will perform recessive policies, automatically also the balance of trade of Germany will suffer, because of a lower foreigner demand, worsening the employment rate. It is indeed desirable that European Members coordinate for a first best solution, without implementing all together recessive policies .
9 The data is taken from the dataset of United Nation Com Trade, and it is described in detail in the empirical section.
10 The index is constructed as follows: (Export-Import)/(Export+Import)*100
11 In this work is assumed that the value of the current account and balance of trade is approximately the same, since the bulk of the current account is the balance of trade, especially for similar countries. Therefore, in the empirical section, the balance of trade is the dependant variable, and it is not taken into account any kind of net amount received for domestically-owned factors of production used abroad. Hence, the GDP, and not the GNP, is the relevant measure used in the essay.
12 This conclusion relates on the fact that an additional income would not totally be spent, but a part of it would be saved, therefore is assumed that the marginal rate of saving is different from zero. However, the catching up did not take place, therefore what seemed to be not harmful but natural, a temporary imbalance, it is thereby evaluated in a different way nowadays.