The global financial crisis has breathed new life into hoary arguments about the euro’s imminent demise. Such arguments often invoke Milton Friedman, who warned in 1998 that Europe’s commitment to the euro would be tested by the first serious economic downturn. That downturn is now upon us, but the results have been precisely the opposite of what Friedman predicted.
Unemployment is rising — and with it populist posturing. In countries like Italy, already suffering from Chinese competition, and Spain, which is experiencing a massive housing bust, the pain will be excruciating. Yet neither country shows any inclination to abandon the euro.
They understand that even whispering about that possibility would panic investors. They see how countries like Denmark that maintained their own currencies have been forced to raise interest rates to defend their exchange rates when the US Federal Reserve and the European Central Bank are cutting interest rates. They see how, if there was still a lira or a peseta, they would be experiencing capital flight. They understand that they would have to fend off an old-fashioned currency crisis at the worst possible time. They appreciate that there is stability and security in numbers.
Similarly, the euro-collapse scenario in which such countries successfully pressure the European Central Bank (ECB) to inflate, compelling Germany to abandon the euro, has shown no signs of developing. The ECB, protected by statutory independence and a price-stability mandate, has shown no inclination to accede to pressure from French President Nicolas Sarkozy or anyone else.
One can argue that the worst is yet to come — that there will be more inflation and unemployment down the road — and that, when they come, the euro area will collapse. Euro skeptics always make this argument. But, given recent events, it is now they who bear the burden of proof.
What neither Friedman nor anyone else anticipated in 1998 was that the first serious downturn following the advent of the euro would coincide with the mother of all financial crises. Runs by panicked investors have required central banks to undertake unprecedented lender-of-last-resort operations. Extensive loan losses have required expensive bank recapitalization operations.
There have been predictions that governments stretched to the limit by the financial crisis might respond by abandoning the euro. They might resort to the inflation tax and inject the national currency to restore liquidity to their banking systems and financial markets.
In fact, the response has been the opposite. The ECB has provided essentially unlimited amounts of liquidity to euro-area financial systems. The Stability and Growth Pact has been relaxed in order to increase governments’ capacity to borrow to recapitalize their banks.
It is European countries outside the euro area, still with their own currencies, that have suffered the gravest difficulties. Because their currencies are not widely used internationally, many of their bank liabilities are in euros. This renders them dependent on interest rate hikes to attract — via the market and on swap lines from the ECB — the euro liquidity that their banks desperately need. So far, those swaps have been forthcoming, but with delay and political baggage attached.
The implication is clear. National banking systems need a lender of last resort. In small countries, where a significant share of bank liabilities is in someone else’s currency, the national central bank lacks this capacity. The only options are then to slap draconian controls on the banking system or join the euro area.
Given the difficulty of rolling back the financial clock and the constraints of the Single Market, it is clear which way European countries will move. One already sees a shift in public opinion toward euro adoption in Denmark and Sweden. Poland has reiterated its commitment to adopting the euro. Hungary is certain to do likewise.
Obviously, the crisis will be economically and financial challenging for Eastern Europe. It will heighten the difficulty of meeting the convergence criteria for euro adoption. But it will also heighten the will to succeed.
The implication, then, is a larger euro area, not a smaller one, as more countries see the writing on the wall. Indeed, there are already signs of countries not even in the EU, notably Iceland and Switzerland, contemplating accession as a step toward adopting the euro and resolving their financial dilemma.
The one exception is probably Britain, whose currency is used internationally as a legacy of its history. In any case, Britain has always had one foot in Europe and one foot out. It is conceivable, therefore, that Europe will have two currencies, the euro and sterling, in the long run. But having three currencies, much less three dozen, is out of the question.
Barry Eichengreen is professor of economics at the University of California, Berkeley.
COPYRIGHT: PROJECT SYNDICATE
“Testy,” “divisive,” “frigid,” “an exchange of insults” were some of the media descriptions of last month’s meeting in Anchorage, Alaska, between US Secretary of State Antony Blinken, US National Security Adviser Jake Sullivan and their Chinese counterparts. Council on Foreign Relations president Richard Haass said that, rather than the “deft handling” needed in US-China relations, this encounter was “mishandled, a terrible start [with] way too much public signaling.” Yet, contrary to conventional wisdom, the acrimonious encounter with Chinese Minister of Foreign Affairs Wang Yi (王毅) and Chinese Central Foreign Affairs Commission Director Yang Jiechi (楊潔篪) was a great success for US diplomacy
In studies of Taiwan’s demographic changes, the Institute of Sociology at Academia Sinica has found that a mere 36.5 percent of men and 19.6 percent of women think getting married is an important life event. The institute also found that the government spending money or amending laws and regulations in order to encourage families to have children is having no impact on the birthrate. Opinions differ on whether this kind of change is a matter of national security, as Japan faces a similar situation, without having a negative impact on its economic strength. Fewer women are willing to marry and the divorce
Interrupting the assimilation of Xinjiang’s Uighur population would result in an unmanageable national security threat to China. Numerous governments and civil society organizations around the world have accused China of massive human rights abuses in Xinjiang, and labeled Beijing’s inhumane and aggressive social re-engineering efforts in the region as “cultural genocide.” Extensive evidence shows that China’s forceful ethnic assimilation policies in Xinjiang are aimed at replacing Uighur ethnic and religious identity with a so-called scientific communist dogma and Han Chinese culture. The total assimilation of Uighurs into the larger “Chinese family” is also Beijing’s official, central purpose of its ethnic policies
Early last month, China’s rubber-stamp legislature, the National People’s Congress (NPC), officially approved the country’s 14th Five-Year Plan. The strategy was supposed to demonstrate that China has a long-term economic vision that would enable it to thrive, despite its geopolitical contest with the US. However, before the ink on the NPC’s stamp could dry, China had already begun sabotaging the plan’s chances of success. The new plan’s centerpiece is the “dual-circulation” strategy, according to which China would aim to foster growth based on domestic demand and technological self-sufficiency. This would not only reduce China’s reliance on external demand; it would also