{"id":28304,"date":"2016-08-24T11:00:38","date_gmt":"2016-08-24T01:00:38","guid":{"rendered":"http:\/\/www.aspistrategist.ru\/?p=28304"},"modified":"2016-08-23T10:37:30","modified_gmt":"2016-08-23T00:37:30","slug":"reform-divorce-europe","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/reform-divorce-europe\/","title":{"rendered":"Reform or divorce in Europe"},"content":{"rendered":"

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To say that the eurozone has not been performing well since the 2008 crisis is an understatement. Its member countries have done more poorly than the European Union countries outside the eurozone, and much more poorly than the United States, which was the epicenter of the crisis.<\/p>\n

The worst-performing eurozone countries<\/a> are mired in depression or deep recession; their condition\u2014think of Greece\u2014is worse in many ways than what economies suffered during the Great Depression of the 1930s. The best-performing eurozone members, such as Germany, look good, but only in comparison; and their growth model is partly based on beggar-thy-neighbor policies, whereby success comes at the expense of erstwhile \u2018partners.\u2019<\/p>\n

Four types of explanation have been advanced to explain this state of affairs. Germany likes to blame the victim, pointing to Greece\u2019s profligacy and the debt and deficits elsewhere. But this puts the cart before the horse: Spain and Ireland had surpluses and low debt-to-GDP ratios before the euro crisis. So the crisis caused the deficits and debts, not the other way around.<\/p>\n

Deficit fetishism is, no doubt, part of Europe\u2019s problems. Finland, too, has been having trouble adjusting to the multiple shocks it has confronted, with GDP in 2015 some 5.5% below its 2008 peak.<\/p>\n

Other \u2018blame the victim\u2019 critics cite the welfare state and excessive labor-market protections as the cause of the eurozone\u2019s malaise. Yet some of Europe\u2019s best-performing countries, such as Sweden and Norway, have the strongest welfare states and labor-market protections.<\/p>\n

Many of the countries now performing poorly were doing very well\u2014above the European average\u2014before the euro was introduced. Their decline did not result from some sudden change in their labor laws, or from an epidemic of laziness in the crisis countries. What changed was the currency arrangement.<\/p>\n

The second type of explanation amounts to a wish that Europe had better leaders, men and women who understood economics better and implemented better policies. Flawed policies\u2014not just austerity, but also misguided so-called structural reforms, which widened inequality and thus further weakened overall demand and potential growth\u2014have undoubtedly made matters worse.<\/p>\n

But the eurozone was a political <\/em>arrangement, in which it was inevitable that Germany\u2019s voice would be loud. Anyone who has dealt with German policymakers over the past third of a century should have known in advance the likely result. Most important, given the available tools, not even the most brilliant economic czar could not have made the eurozone prosper.<\/p>\n

The third set of reasons for the eurozone\u2019s poor performance is a broader right-wing critique of the EU, centered on eurocrats\u2019 penchant for stifling, innovation-inhibiting regulations. This critique, too, misses the mark. The eurocrats, like labor laws or the welfare state, didn\u2019t suddenly change in 1999, with the creation of the fixed exchange-rate system, or in 2008, with the beginning of the crisis. More fundamentally, what matters is the standard of living, the quality of life. Anyone who denies how much better off we in the West are with our stiflingly clean air and water should visit Beijing.<\/p>\n

That leaves the fourth explanation: the euro is more to blame than the policies and structures of individual countries. The euro was flawed at birth. Even the best policymakers the world has ever seen could not have made it work. The eurozone\u2019s structure imposed the kind of rigidity associated with the gold standard. The single currency took away its members\u2019 most important mechanism for adjustment\u2014the exchange rate\u2014and the eurozone circumscribed monetary and fiscal policy.<\/p>\n

In response to asymmetric shocks and divergences in productivity, there would have to be adjustments in the real (inflation-adjusted) exchange rate, meaning that prices in the eurozone periphery would have to fall relative to Germany and northern Europe. But, with Germany adamant about inflation\u2014its prices have been stagnant\u2014the adjustment could be accomplished only through wrenching deflation elsewhere. Typically, this meant painful unemployment and weakening unions; the eurozone\u2019s poorest countries, and especially the workers within them, bore the brunt of the adjustment burden. So the plan to spur convergence among eurozone countries failed miserably, with disparities between and within countries growing.<\/p>\n

This system cannot and will not work in the long run: democratic politics ensures its failure. Only by changing the eurozone\u2019s rules and institutions can the euro be made to work. This will require seven changes:<\/p>\n