Rethinking the Twin Deficits

This article reexamines the thesis that fiscal deficits cause trade deficits and challenges this explanation of the twin deficits with the following propositions. Differences in competitiveness among nations do not lead to balanced trade. Using a Eurozone case study, the article discusses the nexus between competitiveness and the trade balance. Secondly, the author proposes that causality runs from trade deficits to fiscal deficits when the free trade-balanced trade theory is overthrown, and finally, the article overturns the argument that austerity works.