Feldstein on the Euro

Martin Feldstein has a column on the euro and how France had wanted it to encourage more political integration. Of course, France thought they would lead the political union.  Things are not working out as France had hoped.
Given the  crisis in Greece and the realization that a breakup of the euro zone could happen, we are getting a lot more analysis of the issues.

Tyler Cowen on the Euro Zone

Tyler Cowen has an interesting column in today's business section of the NY Times. He describes the euro zone's instititutional failure in dealing with the crisis.  While the euro creates a "monetary nation", it does not create a true nation. The governments of Greece and Spain are sovereign so all the agreements that brought about the euro are international agreements.  The nation that should be the leader of the group is Germany, but Germany's past makes it difficult for Germany to exert such leadership. (Another leader could be Britain where there is a great deal of human capital in international financial arrangements, but they aren't in the euro zone). Cowen's piece is pretty negative regarding the prospects for a solution that is not very costly.  I am visiting Germany to teach a course for the third consecutive May and the Greek crisis has been in the news each time.  The first time I thought it was interesting but not terribly important, last year I thought it was important and would probably lead to further integration in the EU. This year, I am much more pessimistic about prospects for a successful solution. Something I began to think about being in Germany is that the unification of Germany over two decades ago now offers insight into what is happening in the euro-zone today. After a little research, I'll write more on it in a future post.

Here We Go Again with Greece

This will be the third May in a row in which I teach a course on economic policy in Germany.  The first time I included a case study on the Greek crisis since it was in the news at the time.  Later in the summer, the Greek story settled down only to come on strong again the next April/May. So, I used it again.  Now, we see Greece is again a major story and I will use it a third time.

There are some differences though. While I introduce the students to optimum currency area theory and apply it to the euro-zone, I didn't seriously consider whether Greece might exit the euro in the past.  Now I think the probability is at least 50-50 that they will exit the zone.  A lot depends on the Greek election in June, but even if the more radical elements do not win, will the people put up with "austerity" to the point where it might pay off? How long will it take?  Can they even do it or are their debts too high?

To add to the concerns is the recent French election and how the relationship between France and Germany will alter.  For most of the post-war period, France called the shots with Germany often financing the projects. But, with the passing of years and the growing strenth of Germany's economy, Germany is asserting itself more.  Both the French and German leadership have been committed to the European Union and increased political integration, but this may be changing too.

A recent book in Germany, written by a former banker with the German central bank, is roiling things more.  Thilo Sarrazin's book is entitled, Europe Doesn't Need the Euro. Chancellor Merkel has been quoted as saying the the euro fails, then Europe fails.  It should be an interesting time in Germany

A United States of Europe?

I am in Germany to teach a short-course for a college on economic policy. The current Euro crisis should provide some interesting discussion. There is also an election today in one of the German states that may be interpreted as a judgment on Merkel's focus on Europe rather than on Germany. From the start, the euro was a political rather than an economic move, even though there were economic reasons for moving to a common currency. I think the political motive was to force more political integration. Clearly, all of Europe is not an optimum currency area. Greece is demonstrating that.

Krugman had a piece recently in which he reconsidered whether Greece should pull out of the euro. Earlier, he opposed it on grounds articulated by Barry Eichengreen. I also found Eichengrfeen's analysis persuasive, but, like Krugman, am having second thoughts. Recently, Mankiw also entered into discussion on the issue, with some pertinent comments.

On many occasions when I have visited Europe, I have asked people whether they wanted the EU to eventually be a United States of Europe. Uniformly, the response to that suggestion is horror. Yet, the elites in Europe who helped organize the EU in the early years, and still exist in the governments of major members (France and Germany in particular), want a United States of Europe. The current crisis may push things one way or the other, and I am not certain yet which way.

Europe and the Euro

I don't often agree with Krugman, but when he focuses on international economics, he usually is good. His column in today's NY Times is right on. I would only add that the political elites in Europe who pushed the euro through wanted it to help push more political integration--ultimately a United States of Europe. Hence, Krugman's conclusion along with the supporting statement by Eichengreen are the result of that decision over a decade ago.