The acerbic, iconoclastic, liberal economist Paul Krugman, opinionator for the New York Times, seems less an economist than a political shill these days. Or, so I thought. Then he pens a magnificent analysis of the Eurozone problems and their potential solutions. He offers an objective, lucid, non-normative analysis that anyone wondering where the Euro project might be heading should read. It was published in the January 12, 2011 edition of the New York Times Magazine.
He highlights the difficulties faced by a currency union that is not also a fiscal union. In short, just as I pointed out in a previous post, strong economies (like Germany) benefit at the expense of weak economies (like Ireland, Spain, Greece, Portugal, etc.) with a currency union that is not also a fiscal union. Or, as I put it then:
As it stands, Germany is weakened a bit by the necessity of helping bail out its cohorts in the EU, but will enjoy another quarter of spectacular growth because of Ireland’s, et al, weakness.
The real loser in all this is the US Federal Reserve’s strategy of trying to cheapen dollars to ignite growth. So long as the EU falters, the dollar will remain strong, preventing, or at least substantially muting, the inflation that the Fed so fastidiously believes will provide the answer to US economic doldrums.
But the EU economic dogs suffer as well. If Ireland, Greece, Spain or Portugal had their own currencies, each would likely have cheapened a good deal more than the Euro. Relatively strong economies like Germany keep the Euro from declining enough to provide much benefit to the weak, even as the weak economies Germany is tied to through the EU keep the Euro from rising, benefiting the strong economies even more.
In the end, the EU will have to become a fiscal, as well as monetary, union, if the Euro is to have any chance of surviving. Which, given the amount of sovereignty each EU state would have to yield to Germany, is hardly likely. A monetary and fiscal union of European states would accomplish today what the Third Reich never quite could: German hegemony across the continent.
Which, though in a far lengthier essay (all of which is worth reading), is essentially what Krugman said. Hmm…me agreeing with Krugman. You could knock me over with a feather. Of course, neither I nor Krugman were doing anything other than offering an objective evaluation of the state of European Union affairs.
It would be nice if Krugman would leave his objective lenses on when analyzing the American situation. He offers that the Euro dogs all need to lower their wage rates in order to again be internationally competitive, and can’t do so by the simple expedient of devaluing their currencies so must endure the pain of actual wage cuts, whereas the US can and is doing exactly that with its currency manipulations. In other words, Krugman knows that lower wage rates cure unemployment. But have you ever read him advocate anything of the sort in his regular columns?
In any event, The Road to Economic Crisis (the title of the article) is one of the finest pieces of economic journalism and analysis I’ve lately seen.