A Catastrophe Delayed
I was rereading the spectacularly mistimed Jonung and Drea paper mocking American economists who were skeptical about the euro, and went back to what I wrote in 1998. Here’s how I described the ugly American critique:
Here’s how the story has been told: a year or two or three after the introduction of the euro, a recession develops in part – but only part – of Europe. This creates a conflict of interest between countries with weak economies and populist governments – read Italy, or Spain, or anyway someone from Europe’s slovenly south – and those with strong economies and a steely-eyed commitment to disciplined economic policy – read Germany. The weak economies want low interest rates, and wouldn’t mind a bit of inflation; but Germany is dead set on maintaining price stability at all cost. Nor can Europe deal with “asymmetric shocks” the way the United States does, by transferring workers from depressed areas to prosperous ones: Europeans are reluctant to move even within their countries, let alone across the many language barriers. The result is a ferocious political argument, and perhaps a financial crisis, as markets start to discount the bonds of weaker European governments.
Make that a decade or so rather than a year or two, and not too far off. To be sure, in that article I went on to predict big near-term trouble that, in fact, didn’t turn out nearly as badly as predicted. But the point is that something like the current crisis has always been an obvious danger — one that the architects of the euro chose to brush off.