Sunday, November 7, 2010

We should save the euro

Economic pessimism is spreading among the ideas of opinion leaders. In a recent article, N.Roubini* (called Mr Doom) predicts the collapse of the eurozone. He argues that the fundamentals problems of the euro - high deficits and stocks of debt, loss of competitiveness- are still unresolved, especially in the periphery with the possible default of Greece. He concludes: 

"So a eurozone that needs fiscal austerity, structural reforms, and appropriate macroeconomic and financial policies is weakened politically at both the EU and national levels. That is why my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies".'

Another influential economist, J. Stiglitz** asks whether the euro can be saved looking at the economic situation from a global perspective and warns on the dangers of fiscal austerity.

"For the EU’s smaller countries, the lesson is clear: if they do not reduce their budget deficits, there is a high risk of a speculative attack, with little hope for adequate assistance from their neighbors, at least not without painful and counterproductive pro-cyclical budgetary restraints. As European countries take these measures, their economies are likely to weaken – with unhappy consequences for the global recovery" (...)  The social and economic consequences of the current arrangements should be unacceptable. Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago"

Both are right in their analysis, but they don't have much to offer in terms of proposals to save the euro. The traditional measures such as competitive devaluations or appreciation of the euro are not achievable in current circumstances.  In fact, the European economy  is basically a market social economy ruled by strong supra-national institutions, including the ECB, cohesion transfers and an  internal market which needs to be reinvigorated along the lines of the Monti report. 

In Europe, all political leaders agree that the euro should be saved although they might differ on the solutions. The EU has taken steps for a permanent crisis resolution mechanism to rescue countries in great financial difficulties and will apply sanctions for countries with excessive  budget deficits. What is missing, in fact,  is a fiscal framework giving to the EU - now that it has stronger institutions with the entry into force of the Lisbon Treaty- the power to relaunch the European economy by means of a large infrastructure program which eventually will produce lasting impacts on growth and employment. The issue is again where to find the necessary resources without increasing the stock of public debt. Why isn't possible to create a special Fund with resources from international financial institutions, in particular the European Investment Bank, whose scope is  to contribute to the achievement of EU objectives?

The EU economic model is not flawed, as argued by many economists from the other side of the Atlantic. But it needs a much greater ambition to avoid a high price to pay in terms of jobs and human suffering. 

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