Euro

The Euro's Flailing Threatens Europe

Tuesday 18 January 2011

by: Paul Krugman, Krugman & Co. | Op-Ed

(Image: CartoonArts International / The New York Times Syndicate)

I’ve been writing about the euro a lot lately, which has prompted many readers to chime in.

The most critical argue that the euro is essentially a political project, rather than an economic one.

The truth is that it’s both; this has been Europe’s strategy ever since Robert Schuman, the French foreign minister, proposed the creation of the European Coal and Steel Community, which eventually led to the establishment of what is now the European Union.

In a declaration on May 9, 1950, Mr. Schuman said: “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity… The setting up of this powerful productive unit, open to all countries willing to take part and bound ultimately to provide all the member countries with the basic elements of industrial production on the same terms, will lay a true foundation for their economic unification.”

His strategy was to deliver a series of economic integration plans that would do double duty. First, they had to be economically productive. Second, they would also have to create “de facto solidarity,” moving Europe ever closer to political union — necessary because of the continent’s history of war.

For 60 years, this strategy has been highly successful. Europe is one of the modern world’s greatest, most inspiring stories — peace, prosperity and democracy have flourished where once there were minefields and barbed wire.

But the entire European project depends on each move toward integration’s meeting both the political and economic criteria. It is by no means clear that the euro passes this test, because the underlying economics are questionable.

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As I have said before, Europe’s limited labor mobility and, crucially, its lack of fiscal integration makes its adoption of a common currency problematic at best.

And that spells trouble for the broader European project. Solidarity can only be built with economic measures that work, not with those that don’t.

While I don’t believe that a euro crackup would bring us back to the days of the Siegfried Line, it would put a damper on those feelings of solidarity that are supposed to take the continent, step by step, toward true federation.

If I were a European leader, I’d be very, very worried about this — and willing to take some serious risks to try and turn this situation around. 

Backstory: Markets Grow Uneasy

With concerns about sovereign debt in Europe on the rise, the euro plunged to a three-month low against the dollar in the first week of the year — a sign, perhaps, that the market has little faith in European officials’ efforts to contain the economic crisis.

There are other indications as well. The cost of debt insurance for Italian and Spanish banks has spiked, and bond prices in the euro zone’s periphery countries fell as investors considered the possibility of more bailout activity in Europe. On Jan. 10, officials fiercely denied news reports that France and Germany were trying to convince Portugal to accept aid. “We are not exerting pressure on anyone, but we defend the euro,” said Wolfgang Schäuble, Germany’s finance minister.

Critics say that Europe’s economic crisis reveals the European Union’s fundamental flaw: competing national economic interests often stand in opposition to the common good and to the euro’s overall viability.

“The continuation of widely divergent policies among different countries within a borderless internal market that shares a single currency is untenable,” wrote Felipe Gonzalez, the former prime minister of Spain from 1982-1996, in an op-ed published on Jan. 8 in The International Herald Tribune.

Mr. Gonzalez pointed out that Europe, now at a crossroads, can choose one of three paths. First, the European Union can continue as it is, always struggling to resolve short-term, nationalistic conflicts of interest that threaten to undermine the union. Second, Europe can return to a system of free trade, where each country has its own currency that can be devalued as needed to manage fiscal shortfalls. Or — his preferred option — the E.U. can establish a unified system of governance that regulates European financial institutions, sustains anti-cyclical fiscal policies in support of European economic recovery and coordinates balance-of-payments requirements and taxation.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).

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