A € for your Thoughts(2): Joschka Fischer and Krugman

This has been a very federalist beginning of the week.

First off,  Joschka Fischer, the leader of the rapidly growing German Greens, has argued  (EUobserver and The Parliament)in a politically convincing manner in favour of a federal Europe, with more fiscal responsibility vested in the European Commission. His main argument is that discussions about voluntary de jure transferences of sovereignty from European nation states to the EU are a waste of time, in light of the inevitability of de facto losses of sovereignty to China and the USA. If we don’t want to be led, we must lead, which we can only do united. We must chose between accepting change and shaping it or having it forcefully imposed on ourselves without any say on where the future may lead us to. This is very intereting indeed. Particularly in light of the previously mentioned Europhilia expressed by the SPD late last year.

Secondly, here is a truly and amazingly well written piece by 2008 Nobel Laureate in Economics, Paul Krugman, about the situation in the Eurozone. It captures the main arguments about history of the Eurozone extremely well and in a captivating manner, discreetly and unpresumptiously covering the OCA debate about the roles of labour mobility and fiscal union in a currency union. More to the point, he suggests four solutions to the present sovereign debt crisis of the Eurozone periphery:

Early Argentina – “Toughing it out: Troubled European economies could, conceivably, reassure creditors by showing sufficient willingness to endure pain and thereby avoid either default or devaluation. The role models here are the Baltic nations: Estonia, Lithuania and Latvia. These countries are small and poor by European standards; they want very badly to gain the long-term advantages they believe will accrue from joining the euro and becoming part of a greater Europe. And so they have been willing to endure very harsh fiscal austerity while wages gradually come down in the hope of restoring competitiveness — a process known in Eurospeak as “internal devaluation.”

50% Argentina – “Debt restructuring : At the time of writing, Irish 10-year bonds were yielding about 9 percent, while Greek 10-years were yielding 12½ percent. At the same time, German 10-years — which, like Irish and Greek bonds, are denominated in euros — were yielding less than 3 percent. The message from the markets was clear: investors don’t expect Greece and Ireland to pay their debts in full. They are, in other words, expecting some kind of debt restructuring, like the restructuring that reduced Argentina’s debt by two-thirds. (…) Such a debt restructuring would by no means end a troubled economy’s pain.(…) The real question is whether such restructurings will spread to Spain and — the truly frightening prospect — to Belgium and Italy, which are heavily indebted but have so far managed to avoid a serious crisis of confidence.”

Full Argentina: Argentina didn’t simply default on its foreign debt; it also abandoned its link to the dollar, allowing the peso’s value to fall by more than two-thirds. And this devaluation worked: from 2003 onward, Argentina experienced a rapid export-led economic rebound. The European country that has come closest to doing an Argentina is Iceland, whose bankers had run up foreign debts that were many times its national income.(…) The combination of default and devaluation has helped Iceland limit the damage from its banking disaster.

So will one or more troubled European nations go down the same path? To do so, they would have to overcome a big obstacle: the fact that, unlike Iceland, they no longer have their own currencies. As Barry Eichengreen of Berkeley pointed out in an influential 2007 analysis, any euro-zone country that even hinted at leaving the currency would trigger a devastating run on its banks, as depositors rushed to move their funds to safer locales. And Eichengreen concluded that this “procedural” obstacle to exit made the euro irreversible.

But Argentina’s peg to the dollar was also supposed to be irreversible, and for much the same reason. What made devaluation possible, in the end, was the fact that there was a run on the banks despite the government’s insistence that one peso would always be worth one dollar. This run forced the Argentine government to limit withdrawals, and once these limits were in place, it was possible to change the peso’s value without setting off a second run. Nothing like that has happened in Europe — yet.” – Notice how this fails to include any consideration about the (trade) effects of limiting withdrawals in a hard currency union with a common, borderless market.

Revived Europeanism: The preceding three scenarios were grim. Is there any hope of an outcome less grim? To the extent that there is, it would have to involve taking further major steps toward that “European federation” Robert Schuman wanted 60 years ago. In early December, Jean-Claude Juncker, the prime minister of Luxembourg, and Giulio Tremonti, Italy’s finance minister, created a storm with a proposal to create “E-bonds,” which would be issued by a European debt agency at the behest of individual European countries.(…) Nobody is yet proposing that Europe move to anything resembling U.S. fiscal integration; the Juncker-Tremonti plan would be at best a small step in that direction. But Europe doesn’t seem ready to take even that modest step.”

He goes on to soberly conclude that:

“The odds are that the current tough-it-out strategy won’t work even in the narrow sense of avoiding default and devaluation — and the fact that it won’t work will become obvious sooner rather than later. At that point, Europe’s stronger nations will have to make a choice. It has been 60 years since the Schuman declaration started Europe on the road to greater unity. Until now the journey along that road, however slow, has always been in the right direction. But that will no longer be true if the euro project fails. A failed euro wouldn’t send Europe back to the days of minefields and barbed wire — but it would represent a possibly irreversible blow to hopes of true European federation. So will Europe’s strong nations let that happen? Or will they accept the responsibility, and possibly the cost, of being their neighbors’ keepers? The whole world is waiting for the answer.” (emphasis added)

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