Thu, Dec 16, 2010 - Page 9 News List

Amicable divorce better option than years of eurozone decline

By Dani Rodrik

It should have been expected that the political side of the equation would take time to fall into place. It is easy to blame European politicians for their lack of leadership, but let us not underestimate the magnitude of the task that European governments took on.

In fact, the closest analogue to it is the US’ own historical experience with building a federal republic. As the long US struggle for “states’ rights” — and indeed the Civil War — shows, creating a political union out of a collection of self-governing entities is hardly a smooth or speedy process.

States naturally cherish their sovereignty. Worse still, economic union itself can fan the fires of nationalism and endanger political integration. It places strains on each country’s institutions (seen in the pressure on Europe’s welfare states), breeds resentment against foreigners (witness the recent success of anti-immigration parties), and renders financial crises originating from abroad both likelier and costlier (as the current situation makes all too clear).

Alas, it may now be too late for the eurozone. Ireland and the southern European countries must reduce their debt burden and sharply enhance their economies’ competitiveness. It is hard to see how they can achieve both aims while remaining in the eurozone.

The Greek and Irish bailouts are only temporary palliatives — they do nothing to curtail indebtedness and they have not stopped contagion. Moreover, the fiscal austerity they prescribe delays economic recovery. The idea that structural and labor-market reforms can deliver quick growth is nothing but a mirage. So the need for debt restructuring is an unavoidable reality.

Even if the Germans and other creditors acquiesce in a restructuring — not from 2013 on, as German Chancellor Angel Merkel has asked for, but now — there is the further problem of restoring competitiveness. This problem is shared by all deficit countries, but is acute in Southern Europe. Membership in the same monetary zone as Germany will condemn these countries to years of deflation, high unemployment and domestic political turmoil. An exit from the eurozone may be at this point the only realistic option for recovery.

A breakup of the eurozone may not doom it forever. Countries can rejoin and do so credibly, when the fiscal, regulatory and political prerequisites are in place. For the moment, the eurozone may well have reached the point where an amicable divorce is a better option than years of economic decline and political acrimony.

Dani Rodrik is professor of Political Economy at Harvard University’s John F. Kennedy School of Government and the author of One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.

COPYRIGHT: PROJECT SYNDICATE

This story has been viewed 1952 times.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top