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 ide
by side the stories appeared for most of the last week: the launch
of the Euro, establishing a new single currency for the European
Union, and the ending of the fixed link between the Argentine peso
and the U.S. dollar. Day after day there were glowing stories of
how the Europeans were lining up to exchange their francs and lira
for Euros in a historic new step towards European unity. In the
same papers, often on the same pages, there were horrifying accounts
of how the Argentines were seeking vainly to get their hands on
dollars before the peso was officially devalued and their savings
cut by almost a third.
One set of stories described the optimistic birth of a new currency
union; the other the humiliating collapse of an earlier one. Yet
scarcely a report made the obvious connection between these two
events. A trawl through the early accounts discovered one modest
warning reference by Andrew Sullivan in the London Sunday Times
to the Argentine disaster as a sign that the Euro might not necessarily
succeed. Otherwise Europe's glorious future was quite unsullied
by Argentina's collapsing present.
What was going
on?
Well, it is
sadly possible that some reporters may not have realized that there
was a connection. Though the Argentine crisis began as a currency
problem (aggravated, to be sure, by excessive government spending),
it quickly became a political and constitutional crisis with rioting
in the streets and five presidents succeeding each other within
two weeks.
As presidents
fell like ninepins, moreover, the historians appeared on op-ed pages
to remind us that Latin America's conversion to democracy, free
markets, and fiscal responsibility was very recent — and, so
to speak, unstable. We should not be too surprised at Argentina's
reversion to inflation, debt default, and political upheaval. It
was deeply imprinted in the national psyche and would not be overcome
easily.
By the end
of last week, some U.S. political correspondents finally discerned
at least one wider lesson: President Bush's plans for a continent-wide
economic bloc, the Free Trade Area of the Americas, had taken a
knock. For the Argentine collapse was being blamed by many people,
including Argentinian voters, on the nation's conversion to free
markets and free trade rather than on the collapse of its un-free,
fixed-price currency. So they would probably be reluctant to swallow
more free-market medicine — and so might their neighbors.
In short, there
was so much going on that many people forgot the root of the crisis:
namely that the Argentine currency board, by taking on the obligation
to exchange one dollar for one peso, was compelled to raise interest
rates to the point where it inflicted a seemingly endless recession
on the economy.
Yes, this was
made worse by excessive government spending. But the basic problem
was the Argentina's monetary policy and exchange rate were in effect
set by the U.S. Federal Reserve. And as the serious economic commentators
finally arrived (late in the economic cycle) to point out in their
weekly columns, this meant that Argentina was unable to use these
economic weapons to deal with the nation's problems.
Thus, the U.S.
economist Irwin Stelzer in the London Sunday Times: ".
. . the authorities were helpless when Argentina's principal trading
partner, Brazil, devalued its currency. The overvalued peso made
it impossible for exporters to hold onto markets, forcing factories
to close and unemployment to top 20 percent." Not long afterwards,
it also led to riots and revolution.
Which is where
the euro comes in. As columnists like Stelzer and William Rees-Mogg
in the London Times pointed out, the euro is an Argentine
currency board on a much larger scale, uniting the currencies of
twelve European nations from Finland to Sicily. This currency union
also has a "one-size-fits-all" monetary policy on the
Argentine model. Which means that no monetary policy set by the
European Central Bank can possibly suit both Germany (whose economy
is faltering and needs the boost of low interest rates) and Spain
(which is inflating and needs the correction of higher ones.)
In the United States, we solve or at least ameliorate this problem
of regional economic variations by labor mobility. When California
hits a slump, some workers uproot themselves to move to the job
opportunities in a part of the U.S. that is booming. In some of
the individual European nations now in Euroland, they have traditionally
responded with regional cross-subsidies, taxing the booming North
of Italy to finance grants to the depressed Mezzogiorno. And so
on.
But the European
Union can resort to neither remedy to the degree necessary: Germans
are unlikely to move to Spain in the numbers that would restore
equilibrium in both countries; and Italians are even less likely
to vote for large subsidies to Greece or Belgium. Because America
is a nation as well as a currency union, its people are prepared
to make these kind of sacrifices for each other in hard times; because
Euroland is a collection of different nations in a monetary straitjacket,
its peoples see no reason to bail out their neighbors from troubles
they darkly suspect may be well-deserved.
What this ultimately
threatens is that Euroland, like Argentina, will be rocked by perennial
crises, with inflation in one country, long-running joblessness
in another, and instability everywhere.
Journalists
are supposed to notice that kind of possibility. Why did they not
do so?
Most reporters
lack passionate opinions on exchange-rate mechanisms. They do not
root for the crawling peg, nor abhor "the snake in the tunnel."
So the celebratory tone of most coverage — which concentrated
either on the sheer excitement of the launch or on the "historic"
nature of the event — is best explained as an expression of
elite conformity.
Conventionally
minded bankers, politicians, corporate officers, foundation executives,
and Ivy League reporters all know-without ever having really thought
about the matter-that the European Union is a Good Thing. And, by
extension, the euro is a Good Thing too, a step forward, you know,
historic, an insurance against future European wars, the fulfillment
of an idealistic dream, that kind of thing.
The collapse
of the same dream next door did not suit that scenario. To draw
attention to it might have seemed grudging, or party pooping, or
anti-European, or the vulgar triumphalism of an American provincial.
So it was passed over in discreet silence.
In the case
of the Wall Street Journal editorial page, the explanation
is somewhat different, perfectly clear, and above board. Those who
labor on its editorials are dedicated in principle to the euro,
the concept of currency boards, currency unions, and other "hard"
versions of fixed rates and so they are reluctant to suggest that
such mechanisms might be fatally flawed.
Tuesday's WSJ
editorial was a gallant attempt to rescue something from the Argentine
conflagration by arguing that all would have been well if the government
had lived within its currency discipline, if it had avoided overspending,
and if Brazil had not devalued.
True enough
— and all would be well with any currency system if the government
in question accepted its discipline and lived within its means and
if the economy did not experience any external shocks. It is also
true that if men were angels, the earth would be a little bit of
heaven. They're not and it isn't.
This leaves
the WSJ firmly on the hook, however, because its case against
flexible exchange rates was that they permitted government laxity
even if they successfully accommodated to external shocks whereas
a currency board
would be a firm discipline both restraining government spending
and compelling the economy to adjust to external shocks with downward
flexibility of labor and other costs.
"Oh well,"
as the airplane designer says as he surveys the crashed prototype
in the Peter Arno cartoon, "back to the drawing board."
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