Just when it seemed that things could not get worse, it appears that they have. Even some of the ostensibly “responsible” members of the eurozone are facing higher interest rates. Economists on both sides of the Atlantic Ocean are now discussing not just whether the euro will survive, but how to ensure that its demise causes the least turmoil possible.
It is increasingly evident that Europe’s political leaders, for all their commitment to the euro’s survival, do not have a good grasp of what is required to make the single currency work.
The prevailing view when the euro was established was that all that was required was fiscal discipline — no country’s fiscal deficit or public debt, relative to GDP, should be too large. However, Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt.
So now European leaders say it is the current-account deficits of the eurozone’s member countries that must be kept in check.
In that case, it seems curious that, as the crisis continues, the safe haven for global investors is the US, which has had an enormous current-account deficit for years.
So, how will the EU distinguish between “good” current-account deficits — a government creates a favorable business climate, generating inflows of foreign direct investment — and “bad” current-account deficits? Preventing bad current-account deficits would require far greater intervention in the private sector than the neoliberal and single-market doctrines that were fashionable at the euro’s founding would imply.
For example, in Spain money flowed into the private sector from private banks. Should such irrational exuberance force the government, willy-nilly, to curtail public investment? Does this mean that government must decide which capital flows — say into real-estate investment, for example — are bad and so must be taxed or otherwise curbed? To me, this makes sense, but such policies should be anathema to the EU’s free market advocates.
The quest for a clear, simple answer recalls the discussions that have followed financial crises around the world. After each crisis, an explanation emerges, which the next crisis shows to be wrong or at least inadequate. The 1980’s Latin American crisis was caused by excessive borrowing, but that could not explain Mexico’s 1994 crisis, so it was attributed to under-saving.
Then came East Asia, which had high savings rates, so the new explanation was “governance.” However, this, too, made little sense, given that the Scandinavian countries — which have the most transparent governance in the world — had suffered a crisis a few years earlier.
There is, interestingly, a common thread running through all of these cases, as well as the 2008 crisis: Financial sectors behaved badly and failed to assess creditworthiness and manage risk as they were supposed to do.
These problems will occur with or without the euro. However, the euro has made it more difficult for governments to respond. The problem is not just that the euro took away two key tools for adjustment — the interest rate and the exchange rate — and put nothing in their place, or that the European Central Bank’s mandate is to focus on inflation, whereas today’s challenges are unemployment, growth and financial stability. Without a common fiscal authority, the single market opened the way to tax competition — a race to the bottom to attract investment and boost output that could be freely sold throughout the EU.
Moreover, free labor mobility means that individuals can choose whether to pay their parents’ debts: Young Irish can simply escape repaying the foolish bank-bailout obligations assumed by their government by leaving the country. Of course, migration is supposed to be good, as it reallocates labor to where its return is highest. However, this kind of migration actually undermines productivity.
Migration is, of course, part of the adjustment mechanism that makes the US work as a single market with a single currency. Even more important is the US federal government’s role in helping states that face, say, high unemployment, by allocating additional tax revenues to them — the so-called “transfer union” so loathed by many Germans.
However, the US is also willing to accept the depopulation of entire states that cannot compete. Are European countries with lagging productivity willing to accept depopulation? Alternatively, are they willing to face the pain of “internal” devaluation, a process that failed under the gold standard and is failing under the euro?
Even if those from Europe’s northern countries are right in claiming that the euro would work if effective discipline could be imposed on others (I think they are wrong), they are deluding themselves with a morality play. It is fine to blame their southern compatriots for fiscal profligacy or, in the case of Spain and Ireland, for letting free markets have free reign, without seeing where that would lead.
However, that does not address today’s problem: Huge debts, whether a result of private or public miscalculations, must be managed within the euro framework.
Public-sector cutbacks today do not solve the problem of yesterday’s profligacy, they simply push economies into deeper recessions. Europe’s leaders know this. They know that growth is needed. However, rather than deal with today’s problems and find a formula for growth, they prefer to deliver homilies about what some previous government should have done.
This might be satisfying for the sermonizer, but it won’t solve Europe’s problems — and it won’t save the euro.
Joseph Stiglitz is a professor at Columbia University and a Nobel laureate in economics.
Copyright: Project Syndicate
Could Asia be on the verge of a new wave of nuclear proliferation? A look back at the early history of the North Atlantic Treaty Organization (NATO), which recently celebrated its 75th anniversary, illuminates some reasons for concern in the Indo-Pacific today. US Secretary of Defense Lloyd Austin recently described NATO as “the most powerful and successful alliance in history,” but the organization’s early years were not without challenges. At its inception, the signing of the North Atlantic Treaty marked a sea change in American strategic thinking. The United States had been intent on withdrawing from Europe in the years following
My wife and I spent the week in the interior of Taiwan where Shuyuan spent her childhood. In that town there is a street that functions as an open farmer’s market. Walk along that street, as Shuyuan did yesterday, and it is next to impossible to come home empty-handed. Some mangoes that looked vaguely like others we had seen around here ended up on our table. Shuyuan told how she had bought them from a little old farmer woman from the countryside who said the mangoes were from a very old tree she had on her property. The big surprise
The issue of China’s overcapacity has drawn greater global attention recently, with US Secretary of the Treasury Janet Yellen urging Beijing to address its excess production in key industries during her visit to China last week. Meanwhile in Brussels, European Commission President Ursula von der Leyen last week said that Europe must have a tough talk with China on its perceived overcapacity and unfair trade practices. The remarks by Yellen and Von der Leyen come as China’s economy is undergoing a painful transition. Beijing is trying to steer the world’s second-largest economy out of a COVID-19 slump, the property crisis and
Former president Ma Ying-jeou’s (馬英九) trip to China provides a pertinent reminder of why Taiwanese protested so vociferously against attempts to force through the cross-strait service trade agreement in 2014 and why, since Ma’s presidential election win in 2012, they have not voted in another Chinese Nationalist Party (KMT) candidate. While the nation narrowly avoided tragedy — the treaty would have put Taiwan on the path toward the demobilization of its democracy, which Courtney Donovan Smith wrote about in the Taipei Times in “With the Sunflower movement Taiwan dodged a bullet” — Ma’s political swansong in China, which included fawning dithyrambs