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
The National Health Insurance (NHI) system has been in deficit for three years in a row since it dipped back into the red in 2017. As pressure grows for the government to raise NHI premiums, it is widely hoped that Minister of Health and Welfare Chen Shih-chung (陳時中) can apply the expertise and the political capital he has gained from fighting COVID-19, along with his gifts for communication and mediation, to guide Taiwan’s first steps on the arduous road to NHI reform. Government departments concerned with the NHI have long followed a policy of reducing the deficit by cutting costs. To
Independent Legislator Fu Kun-chi (傅崐萁) is to start his prison term for stock manipulation today, but he has not lost his citizen’s rights and therefore is able to keep his post, a situation that has aroused much controversy. Directly elected officials and representatives at a central government level are allowed to retain their posts and salaries during imprisonment, and they can resume their official duties upon their release, due to the incomplete Civil Servants Election and Recall Act (公職人員選舉罷免法). However, locally elected officials and representatives convicted and sentenced to prison lose their posts in accordance with Article 79 of the Local
A debate has been raging for many years over Taiwan’s teacher’s selection test, with accusations of a non-transparent process that include “special favors,” rigged selection processes with pre-chosen candidates and salary fixing. Persistent rumors of improper practices have led to a constant state of turmoil within the teaching profession. Generally speaking, fewer rumors surround the selection processes run by county and municipal governments than appointments organized at a school level. However, it might be that county and municipal-level appointments are equally non-transparent, but have received less exposure. It is unfortunate, since becoming a teacher should be a matter of pride
Warehouse employees last month staged a walkout in Michigan to demand safer working conditions at their facility. So did workers in New York, Illinois and Minnesota. These and other Amazon.com employees across the US are seizing on the COVID-19 pandemic to demand the world’s largest online retailer offer more paid sick leave and temporarily shut warehouses with infections for deep cleaning. Employees in at least 11 US states this year have voiced their concerns and staged actions to highlight a variety of purported workplace deficiencies, allegations the company has denied. Supporting these Amazon workers are labor groups and unions eager to penetrate the