The Corner

But, Mr. Warner, the Euro Zone Crisis Is Over . . .

Writing for the Daily Telegraph, Jeremy Warner contemplates the arguments that the current tremors in the emerging markets give some sort of justification for what’s going on the euro zone. And then he destroys them:

The idea that, in order to push through painful but necessary economic reform, countries must surrender their sovereignty and nail themselves to the mast of an inflexible currency regime, is . . . patent nonsense. Argentina’s problems have nothing to do with the ups and mainly downs of the peso. They are the result of decades of bad and corrupt government, taken to new heights by the incompetence and cynical populism of the present president, Cristina Kirchner.

Did South Korea need to join a currency union in order to bring about its remarkable economic revival in the wake of the Asian financial crisis of the late 1990s? No, it reformed itself, and, assisted by the following wind of a more competitive exchange rate, has been booming ever since, in a way that the afflicted nations of the eurozone, five long years into the worst economic collapse of the modern age, can only dream of.

Europe offers nothing in the way of solutions, just grinding, destructive austerity, which has inflicted seemingly permanent economic damage on once proud nations. Only growing labour migration prevents a more serious form of what economists call hysteresis – the loss of skills, and therefore economic potential, associated with prolonged periods of high unemployment.

There’s also the question of what happens to the countries that those emigrants leave behind. Some of the smaller countries caught up in this crisis have seen very high rates of emigration, raising the prospect of some form of “national” hysteresis, and a hollowing-out that raises profound questions as to what these nations will really now become.

Back to Warner:

Against the self-harm of the eurozone, Turkey and Argentina look like mere fireflies before the storm. In the scale of things, they don’t matter, and in themselves are unlikely to alter the wider picture of what’s happening in the world. The greater menace still lies in Europe, which, as the US Treasury has observed, now adds a seemingly permanent deflationary bias to the global economy. The structural reform Europe fondly imagines its disciplines impose is just skin-deep. It will, in any case, have only limited impact in economies where the stuffing has been knocked out of demand. Since subjecting itself to the diktats of the EU troika, Ireland has slipped ever further down international “ease of doing business” league tables, while in Italy they cannot even manage to deregulate the taxi service without the country grinding to a halt in a wave of protests.

The reason for this is that structural reform, to be effective (at least in a democracy) generally has to be driven from within a country, something that implies a degree, however reluctant, of authentic domestic political consent. Without that, reform will struggle — thus the trouble over Italy’s taxis — and its continued implementation will start to raise serious questions of democratic legitimacy. The elections to the European Parliament in May could well provide a very sharp lesson of what the consequences of that might be.


One thing the crisis has succeeded in doing, however, is dramatically cutting wages in affected economies. If clobbering people’s standard of living counts as policy success, then Europe is setting new standards, never mind that reduced nominal wages only further increase the size of the debt overhang, making countries even more prone to future financial trouble. Unable any longer to afford its own goods and services, Europe instead dumps its excess production on the rest of the world and calls it progress. There could scarcely be a more counterproductive approach to policy. Incapable of going either backwards to the sovereign independence of the past, or forwards to the burden-sharing which necessarily underpins any successful monetary union, euroland has become stuck in a destructive stagnation of its own making.

All Europe’s great gifts to the world – its inventiveness, industry, art, music, forms of governance, its very sense of identity – spring from its cultural, economic and national diversity. Crushing the life out of this infinite variety in pursuit of some corporatist vision of low-cost international competitiveness seems to have become a goal in itself.

Quite. And it is by far from clear that Europe will even succeed in achieving that aim. After all, more than a century and a half after Italian unity, Naples, economically speaking, is no Milan. How long then will it take Europe’s spavined currency union to put Athens up on a footing with Berlin?


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