Do we have six weeks to save the Euro?
From the Guardian:
George Osborne warned on Friday that the leaders of the eurozone had six weeks to end their political wrangling and resolve the continent’s crippling debt crisis.
Speaking in Washington, the chancellor said that the turmoil in the world’s financial markets meant there was now “a far greater sense of urgency” and mounting pressure on Europe from the G20 group of developed and developing nations.
“There is a sense from across the leading lights of the eurozone that time is running out for them. There is a clear deadline at the Cannes summit [G20] in six weeks time”, Osborne said. “The eurozone has six weeks to resolve this political crisis.”
I don’t think so. I think the Euro was effectively dead on arrival. A fundamentally broken system; and that fundamental discord has now been transmitted around the world in the form of European sovereign debt, infecting the balance sheets of nations and institutions, creating huge counterparty risk, and raising the possibility of a tsunami of defaults.
And why was it fundamentally broken?
Crisis—from the Greek “krisis,” for a turning point in a disease—is one of many English words we owe to the ancient Athenians. Now their modern descendants are reminding us what it really means.Just when it seemed safe to start using the word “recovery,” a Greek crisis is threatening the world economy, and the very existence of the world’s second-biggest currency.
The euro seemed like such a good idea just 10 years ago. Europe had already achieved remarkable levels of integration as a trading bloc, to say nothing of its consolidation as a legal community. Monetary union offered all kinds of alluring benefits. It would end forever the exchange-rate volatility that had bedeviled the continent since the breakdown of the Bretton Woods system of fixed rates in the 1970s. No more annoying and costly currency conversions for travelers and businesses. And greater price transparency would improve the flow of intra-European trade.
A single European currency also seemed to offer a sweet trade. European countries with problems of excessive public debt would get German-style low inflation and interest rates. And the Germans could quietly hope that the euro would be a little weaker than their own super-strong Deutsche mark.
Monetary union had geopolitical appeal, too. In the wake of German reunification, the French worried that Europe was heading for a new kind of domination by its biggest member state. Getting the Germans to pool monetary sovereignty would increase the power of the other members over a potential Fourth Reich. And, best of all, it would create an alternative reserve currency to challenge the mighty U.S. dollar.
Still, when European Commission president Jacques Delors first proposed monetary union, it seemed a wildly ambitious project. Even when it was formally adopted as the third pillar of the European Union in the Maastricht Treaty of 1992, many economists—myself included—remained skeptical.
It was far from clear that the 11 countries that initially joined up constituted an “optimal currency area.” A single monetary policy would likely amplify, rather than diminish, the fundamental differentials between highly productive Germany and the less efficient periphery.
But the worst defect in the design of the EMU, we argued, was that it was uniting Europe’s currencies but leaving its fiscal policies completely uncoordinated. There were, to be sure, “convergence criteria,” which specified that a country could join only if its deficit was less than 3 percent of gross domestic product and its public debt was less than 60 percent. But even when these were turned into a permanent set of fiscal rules in the Stability and Growth Pact, there was no obvious way they could be enforced.
The design of the EMU illustrates a profoundly important truth about human institutions. Just because you don’t create a formal procedure for something you would rather didn’t happen, that doesn’t mean it won’t happen. This was one of the reasons Britaindecided not to join the single currency. A confidential Bank of England paper circulated in 1998 speculated about what would happen if a country—referred to only as “Country I”—ran much larger deficits than were allowed. The result, the bank warned, would be a colossal mess.