The Corner

The Problem with Europe is the Eurozone Itself

Economist Simon Johnson has a very good piece over at the New York Times’s Economix blog reminding people that the problem with the EU right now isn’t austerity or the lack of it (no matter how you define austerity); rather, it’s the assumptions that led to the creation of the single currency union. He writes:

The underlying problem in the euro area is the exchange rate system itself – the fact that these European countries locked themselves into an initial exchange rate, i.e., the relative price of their currencies, and promised never to change that exchange rate. This amounted to a very big bet that their economies would converge in productivity – that the Greeks (and others in what we now call the “periphery”) would, in effect, become more like the Germans.

Alternatively, if the economies did not converge, the implicit presumption was that people would move; Greek workers would go to Germany and converge to German productivity levels by working in factories and offices there.

It’s hard to say which version of convergence was less realistic.

Also, over at Bloomberg View, Caroline Baum makes some similar points and concludes:

If European nations weren’t willing to sacrifice sovereignty when the countries were more or less on an equal footing — having met the criteria outlined in the 1992 Maastricht Treaty on debt, deficits and inflation — it’s hard to see them taking the plunge now. Decisions made under duress tend to be short-term fixes, not long-term solutions. Which is why things will probably sputter along for a good while longer.

The real problem, of course, is that the euro area was always a political ideal designed to constrain Germany’s imperialist tendencies and prevent World War III. To a certain extent, the economic justifications were just that, nothing more.

Now the question is: How does one address this without making the whole thing worse?

(Thanks to Tyler Cowen for the Simon piece.)

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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