Por PAUL KRUGMAN
Not that long
ago, European economists used to mock their American counterparts for having questioned the wisdom of Europe’s march to monetary
union. “On the whole,” declared an article published just this past January, “the euro has, thus far, gone
much better than many U.S. economists
Oops. The article
summarized the euro-skeptics’ views as having been: “It can’t happen, it’s a bad idea, it won’t
last.” Well, it did happen, but right now it does seem to have been a bad idea for exactly the reasons the skeptics
cited. And as for whether it will last — suddenly, that’s looking like an open question.
the euro-mess — and its lessons for the rest of us — you need to see past the headlines. Right now everyone is
focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their
spending. But that’s only part of the story for Greece, much less
for Portugal, and not at all the story for Spain.
The fact is that
three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the
United States ran in the mid-1980s (morning in America!),
while Spain actually ran a surplus. And
all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in
the euro zone made Greek, Portuguese and Spanish bonds safe investments.
Then came the
global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro,
which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.
nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the
rest of Europe. Now that the money is no longer rolling in, those countries need to get costs
back in line.
a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought
in line by adjusting exchange rates — e.g., Greece
could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that
Greece and Germany
share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation
and Greek deflation. And since Germany
won’t accept inflation, deflation it is.
The problem is
that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves
a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall
while the debt burden doesn’t.
Hence the crisis.
Greece’s fiscal woes would be serious
but probably manageable if the Greek economy’s prospects for the next few years looked even moderately favorable. But
they don’t. Earlier this week, when it downgraded Greek debt, Standard & Poor’s suggested that the euro value
of Greek G.D.P. may not return to its 2008 level until 2017, meaning that Greece
has no hope of growing out of its troubles.
All this is exactly
what the euro-skeptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.
So what will happen
to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government
that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis
countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures
like temporary restrictions on bank withdrawals. This would open the door to euro exit.
So is the euro
itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction
that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.
are the lessons for the rest of us?
The deficit hawks
are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink.
What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined
the euro, the governments of Greece, Portugal
and Spain denied themselves the ability
to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.
And when crisis
strikes, governments need to be able to act. That’s what the architects of the euro forgot — and the rest of us
need to remember.