Three years on, debate still rages over what is to blame for the euro crisis and what to do about it. Meanwhile, large parts of the euro zone are in a deep recession, and the talents of a generation of young people are being wasted.
In looking at what went wrong, some point to the profligacy of borrowers, while others stress the design flaws in the system. Yet others pin the blame on how the crisis has been managed. There are still others who think that the euro zone is a victim of a credit crunch that began in the United States.
There is some truth in all those explanations. While the credit crunch did set off the crisis, it exposed a host of problems that had been masked by a decade of easy growth. Peripheral countries had grown uncompetitive as a result of rising wages. Often there was corruption and excessive debt, while anti-competitive practices that suited vested interests kept productivity low. Almost everywhere, governments ran unsustainably generous welfare states.
The crisis has also been managed appallingly. The zone took two years to let Greece restructure its debts. In the meantime, the banks in France, Germany and other countries that had financed Athens’s profligacy were able to get much of their money out of the country. If the banks had been hit early, their governments would have had to bail them out. The discussion would then have been as much about foolish lenders as about lazy borrowers.
Among the other mistakes were the failure to clean up the zone’s zombie banks and the fact that both fiscal and monetary policy were too tight. But troubled countries have also taken too long to root out vested interests and restore competitiveness.
Meanwhile, the two most popular solutions to the crisis are not really solutions at all. Euro skeptics want to break up the single currency. While the euro should not have been created when it was, the transitional economic and political costs of abandoning it would be enormous.
Euro enthusiasts, by contrast, pin their hopes on a full fiscal and political union to complement the monetary union. This is pie in the sky. Neither national politicians nor the people are willing to see much more power centralized in Brussels. There is good reason for that, too: The European Union is remote and only loosely accountable.
So what is the way forward? The answer is a muddle-through consisting of small doses of looser monetary and fiscal policy as well as a bit more integration, combined with large doses of change on both national and supranational levels.
To some extent, that is already happening. Only last week, the European Central Bank said it expected to keep its key interest rates at present or lower levels for an extended period. Given that the U.S. Federal Reserve is simultaneously indicating that it will tighten monetary policy as the U.S. economy continues to strengthen, the euro fell a bit versus the dollar. Further depreciation seems likely — something that would take the edge off the euro zone recession.
The E.C.B. has scope to run a looser monetary policy because inflation is undershooting its target of just below 2 percent. But one should not exaggerate its room for maneuver.
Meanwhile, the European Commission has been easing up on the fiscal austerity it demands of nations. This year, it gave several governments an extra year to hit budget targets. Now it is saying that, in some cases, it will exclude investment spending from its deficit calculations for the purpose of deciding whether austerity is required. It should do the same for any money governments inject into their banks as part of the cleanup that is soon to get under way.
But, again, one should not exaggerate the scope for fiscal laxity. Many governments have unsustainable deficits or debts. They cannot put off the day of reckoning forever.
Finally, the euro zone has agreed to some fiscal integration. The main instrument is the €500 billion, or $640 billion, European Stability Mechanism. This can be used to bail out governments and, in the future, banks too. But it is a limited backstop that can only be used as a last resort.
As a result, the heavy lifting remains with national governments, which need to press on with overhauling their labor markets, product markets and welfare states to restore competitiveness and cut unemployment. That is as it should be, because those constitute the bulk of the underlying problems.
What about Germany and the other northern countries? Shouldn’t they do more to help their peripheral brethren? The answer is yes, sort of.
A popular idea is that Berlin should do more to lift its economy by running a loose fiscal policy or encouraging higher pay for workers. Whatever the merits of that idea, two other policies could have a more direct benefit for peripheral economies. First, the European Union should extend the common market to services — opening up, in particular, Germany’s closed market to exports from elsewhere. Second, the European Union needs to spend more to combat youth unemployment. The €6 billion that leaders pledged to spend on that at their recent summit is, frankly, pathetic.
Even with such a raft of policies, it is not certain the euro zone can get out of its funk before the people rebel. But this is the probably the best game in town.
Hugo Dixon is editor at large of Reuters News.
Article source: http://www.nytimes.com/2013/07/08/business/global/08iht-dixon08.html?partner=rss&emc=rss
