The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-term viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. What could replace them?
The Nobel laureate Robert Mundell laid out the conditions under which a single currency could work. Europe didn’t meet those conditions at the time; it still doesn’t. The removal of legal barriers to the movement of workers created a single labour market, but linguistic and cultural differences make US-style labour mobility unachievable.
Moreover, Europe has no way of helping those countries facing severe problems. Consider Spain, which has an unemployment rate of 20% – and more than 40% among young people. It had a fiscal surplus before the crisis; after the crisis, its deficit increased to more than 11% of GDP. But, under EU rules, Spain must now cut its spending, which will likely exacerbate unemployment. As its economy slows, the improvement in its fiscal position may be minimal.
Some hoped the Greek tragedy would convince policymakers that the euro cannot succeed without greater co-operation (including fiscal assistance). But Germany (and its Constitutional Court), partly following popular opinion, opposed giving Greece the help that it needs. Read full article at Project Syndicate…
France / Germany
Sarkozy and Merkel put heads together
In a joint letter to Herman van Rompuy and Jose Manuel Barroso, Berlin and Paris are calling for stricter oversight on rating agencies and fiscal policies in Europe, as well as concrete efforts to shore up European economic governance. “Merkel and Sarkozy out to save the eurozone,” headlines Die Welt, though not without going on to bare the lingering tensions behind this Franco-German entente. Nicolas Sarkozy, for instance, convinced that Greece should have been bailed out from the get-go, reputedly blames Merkel for “increasing the cost of the Greek bailout for EU members by reacting so late in the day”. Officially, however, the French president “wouldn’t want to berate” Berlin. “Contrary to his handling of the crisis in 2008, he is now avoiding the limelight”. This time around “he is opting for the role of the model European”, that of the “Frenchman excoriating the Anglo-American brand of capitalism that gets such bad press in Paris” anyway, reports the Financial Times Deutschland.