Sunday, January 16, 2011

Can Europe be saved?

P.Krugman has written a long paper  as editorialist on New York Times concerning the economic future of Europe, and in particular that of the euro. As many American economists, he expresses a skeptical view about the monetary union using the well known arguments developed by R.Mundell in his theory of optimal currency unions and the need for mobility of labour.

First, it has to be acknowledged that Europe is not a federation like the US; it is an original political project with supranational institutions. Economic power is shared with Member States, with a single currency issued by the European central bank whose aim is to guarantee its stability but fiscal powers of the EU are limited, with a budget of less than 1% of the GDP of the European Union and with no proper European tax.

Second, the debt crisis that affected Greece and Ireland is a different movie that the one we saw happen in Argentina in the 90s. Europe has responded to that crisis with the set up of a Fund to rescue those countries and to calm markets from further speculative attacks. It might not be sufficient but there was a coordinated response, whilst Argentina was left alone with its creditors and the intervention of the IMF which could dictate its conditions without any fierce resistance from national authorities.

Third, the way forward is not choosing between debt restructuring which would imply higher interests costs for borrowers and internal devaluation with wage cuts as in the Baltic States. P.Krugman is right though that the road to fiscal integration, which would indeed be a crucial step towards a stronger Union seems at the moment unrealistic, because of the obsession of German politicians about deficits. However, the cost of not doing it may result much higher if the debt crisis would cause higher interests and eventually higher sovereign debt levels, which would then be subject to new speculative attacks.

The euro project - which was essentially a political one, just after the disintegration of the Soviet block  in early 90s, cannot fail, as it would mean the failure of the entire European project. European leaders should show for once a vision for Europe instead of pursuing beggar my neighbour policies to seek benefits for them at the expense for the others, just like during the Great Depression of the 30s.

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