Explaining the Euro’s Failure?

What happened in Europe?  Economic crises, political gridlock, and even moral reckonings (in the case of Berlusconi or Greek monks) with a possible rescue by the technocrats.  As we continue to try to make sense of it–and the fall of the Euro appears to be more likely, despite the EU Ambassador to the United States’s scheduled lecture topic tomorrow.  Krugman debunks the myths that this proves the failure of the welfare state or the need for immediate austerity:

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.

via Legends of the Fail – NYTimes.com.

And if you happen to be  a struggling Eurozone country–this is how to leave the monetary union (“its fairly straightforward”) according to the economist Stergios Skaperdas.

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2 thoughts on “Explaining the Euro’s Failure?

  1. shanemwbyu says:

    The question I was itching to ask the EU Ambassador to the US (but didn’t) when he came to visit BYU this week was, what about Argentina? Argentina in the 1990s, and culminating in 2001, was facing pressures strikingly similar to Europe today. In the 1990s, tired of its volatile currency and hyper-inflation, Argentina decided to peg the value of its currency to the value of the dollar. Dollars effectively became the currency of the Argentine economy. This bolstered investor confidence, but eroded Argentina’s competitive advantage as an exporter. So what did Argentina do? Borrow. Loans were easy to come by in the 1990s in Argentina, because confidence was high in a steady currency–the US dollar–and consumer spending and growth were booming. But as imports skyrocketed, and exports slumps, the Argentine government borrowed more and more, and unemployment gradually rose. Ordinarily, a country facing these odds could devalue its currency and allow some inflation, but the peso was pegged to the dollar. The looming threat of default drove people to switch their money to dollars and get it out of the country. Then in 2001, Argentina closed the banks. Argentina continued borrowing to pump into its economy, and the interest rates shot up, and there were riots in the streets. Argentina cycled through 5 presidents in a matter of weeks. Shortly thereafter, Argentina defaulted on its debt. Sound familiar?

    The bad news is that while some banks agreed to forgive Argentine debt, others continue to scour the earth for Argentine assets to repossess–an army of international repo men. The good news is, Greece (and the other Euro-zone countries in the same boat) has an advantage: they have already struck a deal for loan repayment as low as 50 cents on the Euro. And then the happier story is what happened to Argentina in the aftermath. They un-pegged their currency, which instantly tumbled to a third of its original value. People lost a lot of money (like 2/3 of their money), but it allowed the country to rebound. Exports strengthened, and now Argentina is among the strongest economies of South America. So my question is, why not Greece? I understand the added intricacies of the Euro-zone, and not having a currency ready for circulation (as Argentina did), but that concept of devaluing currency for short-term losses but long-term gains seems to be the best option. You can’t have a currency that does not represent the true value of your economy. It’s simply too unstable.

    I got all my info for this post from an NPR podcast called Planet Money. Check it out:
    http://www.npr.org/blogs/money/2011/10/14/141365144/friday-podcast-the-price-of-default

    At least it’s a good story.

  2. mwood31 says:

    It is fascinating to read the arguments from whatever side of austerity or bailout. Also interesting to note, is what Krugman called the moral of the story: “beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse. ”

    How true. Twisting facts or misrepresenting circumstances and events can deceive many to their detriment. His article does help us see some more pitfalls, yet it does not bring us closer to a solution. Ireland’s is an interesting story, as is Argentina’s, as the facts were posed to us. But once again, how much do these stories help us? How similar is Argentina to Greece, or Spain, or Italy? And what is really Germany and the European Union’s responsibility or privilege to do?

    Here is an article that talks about macroeconomic history of the crisis and offers some suggestions of the causes. It is an interesting defense of Ireland, Spain, and Italy especially but also raises some questions about Germany’s actions.

    http://www.economist.com/node/21536871

    This article, though, talks about some specific issues within Spain, Italy, Ireland and Greece that could help them. His is interesting especially because he refers to solutions that involve system changes, rather than just a general macroeconomic policy. It has several suggestions that would restructure Spain in order to enable its private markets to prosper.

    http://www.economist.com/node/21536865

    These are two articles that seem particularly interesting when seen in context of this NY Times article and shanemwbyu’s comment. Krugman talked about the dangers of having accepted the euro, and what is is doing to their markets. It is evident that simply dissolving the debt is not good enough, but more is needed. One of the consequences with Europe’s writing off the debt of Greece is that every other nation is now even more tied into how Greece runs their country. Can you blame them?

    Is it right to look at Spain’s and Greece’s problem as only being their adoption of the euro, a currency they do not have power over? Could different macroeconomic policy have been the silver bullet to this debt dragon?

    I doubt it. The problems go deeper than that. It seems the right answer is never that easy, even when it is simple.

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