Halfway Integration of the European Economy Proves Problematic: Matthew Yglesias in The American Prospect
The following is the second half of a piece by Matthew Yglesias (dated February 18, 2010), entitled “No Greek Revival”(and captioned, “Greece’s debt crisis just underscores that the European Union is only as strong as its weakest member.” It appears on the AMERICAN PROSPECT website.
It should be noted that one of the core ideas is one that Paul Krugman has been articulating with some frequency and energy: namely, that the common currency prevents a struggling economy (like Spain’s) from being rescued by a currency re-adjustment, while the lack of genuine unity in Europe means that the richer parts of the Union will not help the region of economic suffering as a depressed state would be helped in the United States.
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[O]fficials in France and Germany are looking to arrange some kind of a rescue — don’t call it a bailout — that would have the EU’s fiscally strong countries guarantee Greek debt in exchange for a government agreement to implement austerity measures on its budget.
The idea is good, but there are at least two interrelated problems. First, it’s not clear how Germany or the European Commission could enforce any such deal, as nothing in the EU’s setup explicitly contemplates this kind of conditional rescue. Second, while this measure will work as a stopgap, it doesn’t do anything to address Europe’s underlying economic problems. Greece’s budget problems are largely about budgeting—years of profligacy and fuzzy accounting got the country into trouble. But Spain, as Paul Krugman has been pointing out, has been a model of fiscal rectitude, running a surplus during the late economic expansion. However, the adoption of the euro is making it very difficult for Spain to weather the current massive recession.
Spain had a Florida-style property boom, which led to massive capital inflows as foreigners invested in Spanish real estate and construction. Spanish wages rose in turn. Then came the crash. In a normal country, the value of Spain’s currency would plummet, making everyone poorer at one swoop but also making Spanish exports cheaper for foreigners to buy and Spanish workers cheaper to hire. That would point the way to recovery. Or if Spain were an American state, it would be supported by federal stimulus dollars, by transfers for Social Security and food stamps, and people would start to move to other states in search of job opportunities.
But Spain and its citizens cannot rely on either of these options. Sure, the European labor market is fairly integrated for a certain kind of high-skill transnational professional. But for your typical middle- or working-class Spaniard, the fact that they don’t speak Spanish in Germany or Finland is a serious impediment to relocating. Consequently, the economies of Spain, Ireland, Portugal, and Italy as well are going to drag along slowly no matter what kind of bailout is organized for Greece. That, in and of itself, is going to lead to budget deficits — and thus the need for tax hikes and spending cuts — that will make these economies even weaker. The result is going to be a human catastrophe and could very well lead to a recurring series of Greece-style debt crises that threaten the stability of the overall system.
Skeptics pointed out the possibility of this problem arising when the single currency issue was being debated in Europe. The proponents of the euro, one suspects, weren’t blind to the risks. But they believed in the project of European integration, so they wanted to move forward anyway, thinking that if things got really hairy one day, disaster would only prove the need for deeper integration. That day has arrived. Europe desperately needs not only some kind of bailout for Greece but a standing formal mechanism for dealing with budget crises. Beyond that, it needs an economic policy that works for the whole continent and not just Germany. That means talking about routine fiscal transfers that are targeted at actual economic needs rather than just French farmers. And in the short run, it means a European Central Bank that pays more attention to the present-day problems of Europe’s most economically vulnerable countries than to the hypothetical risk of inflation in its stronger countries like France and Germany.
The decision to assume that deeper fiscal, political, and economic integration could follow currency integration if needed now looks dubious. But the bet was made in the past, and now Europe’s leaders urgently need to follow through on it and plunge ahead with the kind of steps that can make their system workable. To a considerable extent, the fate of the global economy depends on it.
February 24th, 2010 at 12:21 pm
Yglesias’ brief summary of these issues ring true for me. During the run up to the single currency and the Maastricht Treaty provisions (that required each country, before they could enter the agreement, to set its fiscal and economic house in order such as reducing budget defits to a certain % of their GDP, bring inflation down, etc.), the possibility of differential inflation and GDP growth rates among the countries was debated extensively, but was considered worth the risk.
The benefits of going to a single currency and of other elements of economic integration (for example the right of any Eurpoean resident to relocate and work, as a matter of right, to any other member country) were felt to be overwhelming (mainly in reduced cross border transaction costs and to rebalance differential unemployment rates across the continent). As Yglesias notes, there was an expectation that the stronger economies would somehow be willing and able to help the weaker ones if imbalances arose.
In the intervening years, a formerly weak economy, Ireland, became the “silicon valley” of Europe, giving rise to lots of envy but seemingly demonstrating the success of integration. Now, ironically, the Irish economic miracle has collapsed. Spain was an interesting case as well; it had a relatively poor and less-developed economy, and observers wondered if it woould be helped or harmed by integration with such as Germany and France. It turned out to be a boon to Spain’s economy.
But the Euro zone’s troubles would probably have been tractable had the magnitude of the world financial collapse been so great. There are limits to what shocks any system can absorb. Perhaps this mess is another argument that finance is something that cannot reasonably be left to wild-west deregulation, but rather needs a sort of coordinated regulatory scheme that was let go ove the past couple of decades.
February 28th, 2010 at 10:22 am
This is just the technocrat’s dilemma, trying to manage ethnic, political and nationalistic problems through economic means alone. It gives the illusion of success in good times, but fails horribly when things go bad.
Still, the EU is th most advanced and most highly motivated attempt so far to get past the nation state stage of civilisation. Somehow I think they’re committed to the path their on and if there is a solution to be had, they are most likely to find it first. We can’t even managed intra national tensions between states, we’ve nothing to crow about here.