Will the Euro be Saved?

The outlines of a deal to save the Euro are now perfectly clear.  European nations using the Euro will cede soverign control of the their budgets to a Eurozone fiscal authority that will set limits for debt; in return, now assured of limits on spending, the ECB will turn loose the spigot on printing Euros to buy up European sovereign debt.

If this happens within a month to six weeks, it will be a great triumph and save the Euro in the short term.  If this does not happen in this time-frame, then the markets will probably force  break up of the Eurozone, and it will be extremely messy.

BUT — even if these measures succeed in holding off the collapse of the Euro, they are still but temporary measures to deal with the REAL problem, which is debt.  Greece cannot pay its debts, and will have to arrange a default that is partly covered by German and French bailouts of their bankst that hold Greek debt.

Other countries will only be able to repay their debts if growth resumes (meaning Spain, Italy, and Portugal).  Yet the Euro pact envisaged above may demand austerity measures that will in fact hamper or stop growth in those countries.  Britain is already reaping the outcome of austerity policies, and it is sharply reduced growth.

As we have noted earlier, growth is going to slow in the world economy.  America’s real estate market will be a drag for some time; European labor forces have started to age and shrink, and even China’s labor force growth is coming to an end.  So the growth rates of the 1990s and 2000s — fueled by favorable demography, Chinese leaps forward, lower oil prices, and above all easy credit — are simply not coming back anytime soon.

So the problem for Europe is not only to save the Euro, but to devise policies that will restart growth under extremely adverse conditions, or at least to manage the already large debts in several countries for a near-term future of modest growth.

The obvious solution is to allow some inflation of the Euro, to make exports more attractive and reduce the real value of outstanding debts.  Yet if Germany remains as opposed to raising nominal growth targets as it has been opposed to Eurobonds, then the Euro region may still sink in debts, even if this month’s crisis should pass.

So if you liked the last year, with the Euro economies lurching from one near-crisis to another, you are in luck — we can expect more of the same for years to come.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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