Can the Euro Survive?
For those who have lent the money – and remember this loan has to be on very generous terms if it is to solve even Ireland’s immediate problem – budget strains have increased. Maybe Germany can cope – but what about Greece, Spain, Portugal, and perhaps others? In any event, the nature of the Irish loan, as described above, makes clear the kind of loan terms that will have to be offered to any other EU country that gets into difficulties. Low in cost, and long in term.
Who can offer such loans? More such loans will be needed, for the current loan has not solved the Irish and thus the Euro problem, but just postponed it. For the adjustment mechanisms are not there. Counter-cyclical capital flows do not smooth out regional differences. Persistent sluggish productivity growth is not offset by labour mobility. One country after another, when stress comes, will need a loan. And with one loan after another the burden on the Eurozone’s big and robust economy, Germany, will increase. How long will it be able to bear it? And how long willing?
The Structure of the Eurozone
At some point doubts will develop about the stability of the whole Euro project. These doubts can be eliminated in one of four ways. The union will end; or contract to a core with the peripheral members reverting to national currencies; or there will be a core Euro and a peripheral Euro; or there will be sudden political and fiscal centralisation. Which is most likely? To answer that we have to move into the area of political discussion. The answer is not for an economist to produce. But it is clear that the answer involves responding to two questions. Will Germany want to be in a union with some slow growing, fiscally irresponsible, members? And will some countries want to be in a united Europe in which they are no more than poor, subservient, and unimportant provinces?
The Euro may survive, but it will not survive in its current form.
I am indebted to Alessandro Roselli for discussions on EMU, and to Professor Forrest Capie, Paul Reid, and Dr. A.L. Wood for comments on a draft of this paper.
References
McCallum, B.T. (1996) International Monetary Economics, Oxford University Press, New York
McCallum, B.T. (2003) “Theoretical Issues Pertaining to Monetary Unions”, in Monetary Unions: Theory, History, Public Choice, ed. Forrest Capie and Geoffrey Wood, Routledge, London
Stigler, George J. (1958) “The Economies of Scale”, Journal of Law and Economics, 1
Stigler, George J. (1987) The Theory of Price, Macmillan, London
