Oceania, Eurasia and Eastasia

Euro Counterfactuals (Wonkish) by Krugman

Via The Irish Economy, a new paper (pdf) from the IMF looks at how, exactly, massive current imbalances emerged within Europe, with Germany running huge surpluses and the GIPSIs running huge deficits. 

The paper shows that there were indeed huge capital flows from the European core to the periphery, in Spain largely taking the form of lending to banks, presumably by other banks:

[chart]

The surprising result in the paper is that much of the rise in imbalances within the euro area involved trade with non-euro nations. Germany sharply increased exports to Asia and Eastern Europe, which had strong demand for German durable manufactures.  Meanwhile, southern Europe saw a sharp increase in imports from low-wage countries.

Emphasis added. So basically the U.S. dollar is undervalued relative to China which has a trade surplus. Germany in turn has a trade surplus with Asia (right?). Southern Europe increased its imports from low-wage countries (China?).

Is the Euro undervalued versus the dollar? Why is Germany and not the U.S. supplying Asia with durable manufactures?

Drama

Also Simon Johnson and Tim Duy have been playing up the budget troubles of Japan. Krugman and Yglesias  have been highlighting the problems with Europe and the Greeks and Spainairds revolt against austerity.