The first two components of the euro crisis — a banking crisis that resulted from excessive leverage in both the public and private sectors, followed by a sharp fall in confidence in eurozone governments — have been addressed successfully, or at least partly so. However, that leaves the third, longest-term and most dangerous factor underlying the crisis: the structural imbalance between the eurozone’s north and south.
First, the good news: The fear that Europe’s banks could collapse, with panicked investors’ flight to safety producing a European Great Depression, now seems to have passed. Likewise, the fear, fueled entirely by the EU’s dysfunctional politics, that eurozone governments might default — thereby causing the same dire consequences — has begun to dissipate.
Whether Europe would avoid a deep depression hinged on whether it dealt properly with these two aspects of the crisis. However, whether Europe as a whole avoids lost decades of economic growth still hangs in the balance, and depends on whether southern European governments can rapidly restore competitiveness.
The process by which southern Europe became uncompetitive in the first place was driven by market price signals — by the incentives those signals created for entrepreneurs and by how entrepreneurs’ individually rational responses played out in macroeconomic terms. Northern Europeans with money to invest were willing to lend on extraordinarily easy terms to those in the south who wanted to spend, and ample pre-2007 spending made employers there willing to raise wages rapidly.
As a result, southern Europe adopted an economic configuration in which its wage, price and productivity levels made sense only so long as it spent 13 euros (US$16.78) for every 12 euros that it earned, with northern Europe financing the missing euro. Northern Europe, meanwhile, adopted wage and productivity levels that made sense only as long as it spent less than one euro for every euro that it earned.
Now, if, as appears to be the case, Europe does not want its south to spend more than it earns and its north to spend less, wages, prices and productivity must shift. If we are not to look back in a generation and bemoan “lost” decades, southern European productivity levels need to rise relative to the north, and wage and price levels need to fall by roughly 30 percent, so that the south can pay its way with exports and northern Europe can spend its earnings on those products.
If the euro is to be preserved and if stagnation is to be avoided, five policy measures could be attempted:
‧ Northern Europe could tolerate higher inflation — an extra two percentage points for five years would take care of one-third of the total north-south adjustment;
‧ Northern Europe could expand social democracy by making its welfare states more lavish;
‧ Southern Europe could shrink its taxes and social services substantially;
‧ Southern Europe could reconfigure its enterprises to become engines of productivity;
‧ Southern Europe could enforce deflation.
The fifth option is perhaps the least wise, for it implies the lost decades and EU collapse that Europe is trying to avoid. The fourth option would be wonderful; but, if anyone knew how to bring southern Europe’s enterprises up to the productivity levels of the north, it would have happened already.
So we are left with a combination of the first three options, also known as “policies to restore European growth” — a phrase that appears in every international communique.
However, the communiques never get more specific. Europe’s technocrats understand what adoption of “policies to restore European growth” means. So do some of Europe’s politicians. European voters do not, because politicians fear that spelling it out would be a career-limiting move.
If Europe does not adopt some combination of the first three options as policy goals over the next five years, it will face a stark choice: either lost decades for southern Europe (and perhaps northern Europe as well), or continued north-south payment imbalances that will have to be financed through fiscal transfers — that is, by taxing the north.
Northern Europe’s politicians should become more explicit about what “policies to restore European growth” actually mean. Otherwise, 10 years from now, they will be forced to confess that today’s dithering imposed enormous additional tax liabilities on northern Europe. That might turn out to be the ultimate career bummer.
J. Bradford DeLong, a former deputy assistant secretary of the US Treasury, is professor of economics at the University of California, Berkeley, and a research associate at the US National Bureau for Economic Research.
Copyright: Project Syndicate
Congressman Mike Gallagher (R-WI) and Congressman Raja Krishnamoorthi (D-IL) led a bipartisan delegation to Taiwan in late February. During their various meetings with Taiwan’s leaders, this delegation never missed an opportunity to emphasize the strength of their cross-party consensus on issues relating to Taiwan and China. Gallagher and Krishnamoorthi are leaders of the House Select Committee on the Chinese Communist Party. Their instruction upon taking the reins of the committee was to preserve China issues as a last bastion of bipartisanship in an otherwise deeply divided Washington. They have largely upheld their pledge. But in doing so, they have performed the
It is well known that Chinese President Xi Jinping’s (習近平) ambition is to rejuvenate the Chinese nation by unification of Taiwan, either peacefully or by force. The peaceful option has virtually gone out of the window with the last presidential elections in Taiwan. Taiwanese, especially the youth, are resolved not to be part of China. With time, this resolve has grown politically stronger. It leaves China with reunification by force as the default option. Everyone tells me how and when mighty China would invade and overpower tiny Taiwan. However, I have rarely been told that Taiwan could be defended to
It should have been Maestro’s night. It is hard to envision a film more Oscar-friendly than Bradley Cooper’s exploration of the life and loves of famed conductor and composer Leonard Bernstein. It was a prestige biopic, a longtime route to acting trophies and more (see Darkest Hour, Lincoln, and Milk). The film was a music biopic, a subgenre with an even richer history of award-winning films such as Ray, Walk the Line and Bohemian Rhapsody. What is more, it was the passion project of cowriter, producer, director and actor Bradley Cooper. That is the kind of multitasking -for-his-art overachievement that Oscar
Chinese villages are being built in the disputed zone between Bhutan and China. Last month, Chinese settlers, holding photographs of Chinese President Xi Jinping (習近平), moved into their new homes on land that was not Xi’s to give. These residents are part of the Chinese government’s resettlement program, relocating Tibetan families into the territory China claims. China shares land borders with 15 countries and sea borders with eight, and is involved in many disputes. Land disputes include the ones with Bhutan (Doklam plateau), India (Arunachal Pradesh, Aksai Chin) and Nepal (near Dolakha and Solukhumbu districts). Maritime disputes in the South China