For observers of EMU woes, it came as no surprise that Wednesday’s summit in Brussels ended in a low-key compromise that leaves the eurozone fragility untouched.
In part this is due to the decision making process in the EU, intrinsically incapable of reaching quick and bold decisions. But there are more substantial reasons that lie in the interpretation of the crisis, the “blame game”; a blame game that has no particular interest, were it not that understanding what went wrong should constitute a guide for designing a durable and effective solution.
I published an editorial (Euro : de quoi l’Allemagne a-t-elle peur ?) with André Grjebine on the French newspaper Le Monde:
We argue that the non-optimality of the EMU led to imbalances that go beyond the responsibility of individual countries, and hence that the solution should be symmetric. We also call for a real European Government.
An English version will follow.
European institutions and policy makers seem to share a narrative of the crisis essentially centered on sovereign debt, which they consider as the sole obstacle to a return to a normal state of affairs. Yet, it suffices to look at the other side of the Atlantic, or to go back to the events of 2008, to question this narrative. With the exception of Greece (whose GDP represents 2.5% of that of the eurozone), sovereign debt is today more a consequence than a cause of the crisis. This does not imply that it should be the object of a benign neglect; but understanding why we came to a systemic crisis of this magnitude is crucial for having a coherent discussion of future perspectives.
He has been my first teacher. It is thanks to him that I understood, very young, that the Keynesian principle of effective demand is not a simple special case of the neoclassical theory. Just a few weeks ago I went back to his 1979 CJE controversy on effective demand with Joan Robinson that is surprisingly actual.
But, above all, he taught me rigour, attention to the internal consistency of an argument, and love for economic theory, meant as a conceptual lens to make sense of a complex reality. I had lost him of sight, for a number of reasons of no interest. But his lesson has been invaluable along all my career, and will continue to be. A Maestro…
It is a sad day.
Not too much of a choice here. The first post of a European Gloomy Economist needed to be on the origin of our troubles. Let us start with a few stylized facts:
- The EMU is not an Optimal Currency Area.
- The single currency inevitably led to capital transfers from core to peripheral countries, and to the corresponding current account deficits of the latter (no need to explain; it is remarkably done here).
- Compression of domestic demand (a not too surprising effect of the Hartz reforms) in Germany created a mass of savings ready to fly into high return countries apparently made safe by the Euro.
- Only Greece had a public finances problem, at the onset of the crisis. On the other hand, all of the peripheral countries had an external imbalance.
- Capitals come, but capitals go. The reversal of capital flows is what is creating liquidity (or solvency) problems.
So what? So, the problem is not a Greek (periphery) problem; or, at least, it is as much a Greek/periphery problem as it is a Germany (core) problem.
What should have we done, then? There will be time in the future to discuss these issues in detail. For the moment, it suffices to mention them: Balance demand (more in the core, less in the periphery, to make examples) to reduce the deflationary impact of austerity measures; insist on medium-to-long-run fiscal adjustment, and not on the illusion of expansionary short-term consolidation; accept/trigger a modest inflation surge in core countries, in order to allow peripheral countries to improve their real exchange rate without going into deflation.
In two words: symmetry and solidarity. Two dirty words in the current debate on the EMU