EMU
by DOUG HENWOOD (1998)
Europe is now run by econocrats and central bankers, and it has become the most austere and most orthodox region of the world, with balanced budgets and hard money taking the front seat, and everything else either in the back seat or left behind entirely…. Europe is embracing a new, continent-wide form of money well before all the social structures to support it are fully in place…. In Europe, German industry sets the productivity pace and everyone else tries to keep up. In most cases, that has been a losing battle… But because of their commitment to monetary union, policymakers have done whatever was necessary to prop up their currencies against the mark…. [T]hat has meant excruciating austerity…. This austerity is supposed to have wondrously tonic effects over the longer term; weaker plants will be shut and businesses will go under, thereby boosting average productivity. It hasn’t worked as advertised, and there are few historical instances where it ever has….
Nor does the ECB, with its minimalist charter to maintain price stability above all, have its financial emergency procedures worked out. The Fed regulates and supervises banks, and is prepared to throw money at a financial panic; the ECB has no explicit supervisory responsibilities, deferring apparently to national CBs, and its bailout plans aren’t in evidence – even though EMU is virtually certain to cause great turbulence, as formerly protected national financial institutions face fresh competition. But the only words in the Maastricht Treaty devoted to bailouts – certainly a familiar and crucial aspect of modern financial life – are part of a prohibition: should any EU member country hit a wall, aid from the Union is expressly forbidden.
“What ails Europe?”
by PAUL KRUGMAN (2012)
So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.
More specifically, the creation of the euro fostered a false sense of security among private investors, unleashing huge, unsustainable flows of capital into nations all around Europe’s periphery. As a consequence of these inflows, costs and prices rose, manufacturing became uncompetitive, and nations that had roughly balanced trade in 1999 began running large trade deficits instead. Then the music stopped.
If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.
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