December 12, 2019

IHT Rendezvous: The Future of the Euro: Jack Ewing Answers Readers’ Questions

A machine counts and sorts euro notes at the Belgian Central Bank in Brussels.Thierry Roge/ReutersA machine counts and sorts euro notes at the Belgian Central Bank in Brussels.

First of all, thank you for the large number of excellent questions in response to our call for your queries about the euro crisis. I have picked some questions that were most representative of the interest — from all over the world — and most pertinent. And many thanks to readers like “abo” from Paris who did my work for me and supplied replies of their own.

I’ve condensed and edited the questions somewhat, so apologies if I have misconstrued anything.

An anonymous reader writes:
I would like to understand why it appears that the governments of Greece and Spain, to say nothing of European Central Bank officials, have done nothing to address the looming threat of bank runs in these countries. It seems like they should have long ago thought about how to address this most basic threat.

Your question gets at one of the fundamental issues raised by the crisis. Banks are still regulated at the national level, but their problems can have international consequences.

Greece and Spain have deposit guarantee programs designed to reassure bank customers and prevent runs. But bank customers naturally may wonder whether the guarantees are any good, considering that the governments have severe fiscal problems of their own.

European leaders have talked about a Europe-wide deposit guarantee fund, but so far there has been little action. Mario Draghi, the president of the European Central Bank, has promised that healthy banks won’t be allowed to run out of money. But the E.C.B. can only give banks loans. It can’t replace depleted capital reserves or guarantee deposits.

So for the time being bank runs remain a threat.

From Hanno Achenbach in Essen, Germany:
How can one seriously believe that 5 percent inflation in Germany would help Greece, Italy, Spain or France in any significant way? Do you believe that? If so, please indicate precisely how much that would help those countries over their ears in debt?

The argument — and I’m not saying I agree with it — is that higher inflation in Germany makes it easier for Greece, Spain, Italy and Portugal to become competitive again. By some estimates Greek wages need to fall 40 percent before unit labor costs are on a par with Germany. (German workers earn much more than Greeks, but on average are more productive, so it is cheaper to produce something in Germany than Greece.)

If wages in Germany rise faster, then wages in other countries don’t need to fall as much, or so the argument goes. Also, inflation erodes the value of the debt, which then becomes easier to repay.

The big problem with this argument is that European countries don’t just compete with each other. They compete with the whole world. So if German wages rise too much, the whole continent could become less competitive.

From Schmid in East Lansing, Michigan:
Why can’t the E.C.B. do like the U.S. and Iceland did — essentially loan money to banks and nations? Iceland nationalized the banks and wrote off the bad loans and started over. The U.S. took equity interest in failing banks. If central banks can loan to banks, why can’t they loan to nations?

The E.C.B. can and does loan huge sums to banks, but by charter it is not allowed to finance governments. The E.C.B. has already bent this rule by buying some government bonds on open markets. But it is unlikely that the E.C.B. will ever buy government bonds on the same scale as the Federal Reserve. Some economists and political leaders think it should, but “quantitative easing” would encounter huge resistance in Germany and other northern countries.

Europe is discussing pooling its debt into some form of euro bond, but for the time being Germany remains allergic to any solution that calls for its taxpayers to assume the financial burdens of other countries.

From Rational Expectations, New York:
It seems to me that the version of austerity which has been applied by the indebted European governments has been to stick it to the private sector by raising or increasing collection of taxes, which is contractionary, with little, if any, pro-growth supply side policies such as labor market reforms, privatizations or reductions in civil service numbers, salaries or benefits. Is this a correct impression, and, if so, what can be done to get the governments to take some of the pain themselves so that the affected economies have a chance to grow?

In fact, the European Central Bank has criticized governments for applying the wrong kind of austerity, increasing sales taxes for example when they could cut government bureaucracy. European governments almost everywhere, not just the troubled countries, have been slow to deregulate labor markets or take other steps — structural reforms — that economists say would promote growth. Even Germany, though often praised for loosening its labor rules in recent years, faces criticism for regulations that impede lively competition among small service businesses.

If political leaders took steps to encourage growth, they would also have an easier time paying the national debt. But they are still dragging their feet. The problem, from an elected official’s point of view, is that most of these changes cost votes. If a government cuts the salaries of 500,000 public employees, for example, it probably loses the votes of those workers without necessarily getting much credit from the rest of the electorate.

From Mark T., New York:
It seems to me that there are two Europes, the productive and less corrupt north and the less productive and more corrupt south. Is there any talk of simply going to two currencies, one for the northern and one for the southern nations?

Many people would find your characterizations of southern and northern Europe over broad. That said, we can all understand that at heart your question is about relative levels of corruption and productivity.

In fact, some people have proposed exactly this solution. Most economists would agree that a common currency has a better chance of working among countries that have similar levels of productivity and growth. The problem would be how to disentangle the euro zone without incurring enormous costs. Also, the idea of having two currencies is built on the assumption that the northern and southern countries will always be similar to one other. But there is not really any reason why this should be so. Only a few years ago Germany was seen as the sick man of Europe and a drag on the rest of the continent. So I would not assume that the northern countries will always have better economies than the southern countries.

Taxpayer in Athens writes:
Has anybody calculated so far how much (and if) Germany has benefited from the euro, including the amount already paid for aiding Greece and other countries in trouble?

I’m not aware of anyone who has come up with a sum total of the benefits to Germany, but you raise an important point. Germany is able to borrow money at nearly zero interest rates, which is helping the country to lower its deficit without too much pain.

In addition, German companies are almost certainly enjoying a lower exchange rate with the euro than they would if they still had the Deutschmark — just look at how the Swiss franc has gone through the roof (though part of the current rise has to do with being a so-called safe haven during the turmoil around the euro). Still, the weak euro makes German products less expensive in dollars or other foreign currencies and makes it easier for German companies to compete on price in export markets.

It is probably impossible to quantify those benefits, but I think it is safe to say they exceed the cost of aid provided to Greece and other countries.

From Arnie in San Diego:
One reads about structural impediments such as the wealthy evading taxes in Greece and Italy, and about the lack of competition in these countries because of the strength of unions, and the difficulty in obtaining new business licenses and the like. Even if some austerity conditions imposed by the E.C.B. and others were relaxed or eliminated, as some economists propose, would the economies of these countries become sound if the existing structural impediments were not eliminated?

The debt crisis probably wouldn’t exist if Spain, Greece, Italy and Portugal had healthier economies. Greece, in particular, is known for being a difficult place to do business. It takes 77 days just to get electricity hooked up, according to the World Bank. Any long-term solution to the debt crisis has to include an overhaul of economies in the troubled countries. The political leaders know this. They are just having trouble getting it done.

From Spanky in France:
Could you detail the kinds of steps that would have to be taken for Greece to exit (or be forced out of) the euro zone?

There is no official procedure for a country to leave the euro zone, and no country can be kicked out. If Greece decides to leave on its own, or is forced to by circumstances, European leaders will have to improvise. There is no road map. While some economists say a Greek exit is manageable, others think it could create social chaos in Greece and financial turmoil in Europe and the rest of the world, perhaps on the same scale as the collapse of Lehman Brothers in 2008.

Adam Corson-Finnerty of Southampton, Pennsylvania, asks:
I wonder whether this crisis could represent a milestone in the further integration of European nations. Is the cost of unwinding steeper than the cost of moving forward? I also wonder if the United States has an interest in which way things go? We seem to be standing on the sidelines.

The crisis has already forced European nations to create a common bailout fund and agree on ways to impose more fiscal discipline on each other. There is talk, though not much action, of common supervision of banks and euro bonds (see above). One of the lessons of the crisis, not lost on political leaders, is that it is very hard for a common currency to work in a fragmented economic and political system. The costs of unwinding the euro and the benefits of doing so are probably impossible to quantify, but the risks are massive and it is not in the nature of policymakers to embark on grand experiments. So, yes, the crisis could well push Europe closer together.

The United States definitely has an interest in the way things go because financial upheaval in Europe can easily spread across the Atlantic via the banking system. Europe is also an important market for many U.S. companies. I wouldn’t say the United States is standing on the sidelines. President Obama and other top U.S. officials have repeatedly pressed their European counterparts to move more aggressively to contain the crisis. But there is a limit to what they can get the Europeans to do.

Article source: http://rendezvous.blogs.nytimes.com/2012/06/01/the-future-of-the-euro-jack-ewing-answers-readers-questions/?partner=rss&emc=rss

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