Sunday, 4 September 2011

German professor on the euro: "a bad solution for a nonexistent problem"

The eminent German economic historian Hans-Joachim Voth (Universitat Pompeu Fabra, Barcelona) has specialized in financial markets, long-run economic growth, as well as political risk and macroeconomic instability. That is why his views on the current euro crisis are of particular interest:

SPIEGEL: Why can't the euro survive?
Voth: Even bad economic arrangements can be kept going for a long time. But the real questions are: Whom does that help? How long can one stand the pain? And what's the use? The euro can technically survive, but so can the never-ending attacks on the bond markets that are increasing the pain. But that just exacerbates the fundamental problem: that the main shock absorber has fallen away in the countries with very rigid labor markets …
SPIEGEL: … because these countries can no longer manipulate the values of their currencies to meet their individual needs.
Voth: Before, if Spain had gotten stuck in the kinds of difficulties it has today -- unit labor costs are too high, growth is too low, and there is enormous unemployment -- the peseta would have simply been devalued by 20 percent. In those days, Spain only had to change a single price -- that of its currency -- in order to make itself competitive again, and the market would generally help out as well. Cars could keep on being built in Pamplona and Seville. Houses on the Costa Brava were still affordable. There were no forced wage cuts in Spain, and prices remained stable. That's it.
SPIEGEL: Why do you think the euro was a dumb idea?
Voth: Because, at its core, it is a bad solution for a nonexistent problem -- a political object of prestige with massive economic disadvantages. Everyone thought the common currency would cause all of the structural differences in the euro-zone countries to automatically disappear. But, after 2000, the low interest rates in the euro zone artificially fuelled growth in the weaker countries and caused real estate prices to skyrocket. This kind of speculative bubble is fun while it lasts. But every party comes to an end eventually. And then comes the rude awakening: Growth slows down, and unemployment rises. Since the banks have given out too many loans, they become a brake on growth. This causes an increase in the structural divergences that were actually supposed to decrease. The euro can't survive for long without having much more redistribution between richer and poorer member countries or much more flexible economies. And neither of those things is politically feasible.
SPIEGEL: Wouldn't abandoning the common currency sound the death knell for the entire EU project?
Voth: I believe that the consequences of ending the euro have been overstated. Not every dumb economic idea needs to be defended to the bitter end. Europe is infinitely more than the European Union, and the European Union is infinitely more than the euro.
SPIEGEL: You give the euro another five years -- what will Europe look like then, in your opinion?

Voth: I can imagine a world where there will a left-over euro: with France, Italy, the Mediterranean countries, perhaps Belgium as well. Apart from that the old Deutschmark zone will return, comprising Germany, Austria and the Netherlands, perhaps Denmark as well, perhaps Finland, which have no problems conducting the same monetary policy as Germany. We had a similar system during the European Exchange Rate Mechanism ERM. That was the optimal system, and then we gave it up for the euro.

Read the entire interview here


It is not difficult to agree with what professor Voth says. Sooner or later, the European political leaders - if not the current, less than brilliant ones, then the next generation - will make the same conclusions. Let´s hope it will be sooner rather than later.

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