These are the worst of times for the euro. Not only is the currency steadily sinking in value, but the Eurozone’s debt crisis has provided all kinds of new ammunition to critics of the monetary union to do some self-satisfied euro-bashing. The euro has even been blamed for causing, or at least exacerbating, the Eurozone’s crisis. One persistent commentator writes on every one of my posts about Europe’s debt woes that countries like Greece would have avoided a crisis if they only had control over their own currencies. He then usually goes on to predict the euro’s doom.
That view is of course too simple. Countries with their own national currencies and full responsibility for their monetary policies fall into debt crises with unfortunate regularity. But at the same time, it’s impossible to separate Europe’s woes from its experiment with monetary union. Does the euro deserve blame for the Eurozone crisis?
There is one way in which I think the euro really did contribute to the current crisis. I find it hard to believe that a country like Greece, for example, would have been able to build up so much debt for so long if it wasn’t part of the Eurozone. By being associated with the euro, and stronger economies like Germany, Greece got something of a free ride from investors who erroneously believed Greek bonds were safer investments because of the country’s participation in the monetary union. That allowed Greece to fuel its profligacy at very low cost (until now). If Greece was on its own, I can’t believe that investors would have handed over so much cash, at least not without asking for a higher yield, Of course, Greece, with its history of fiscal problems, could have gotten itself into trouble regardless of the currency it used, but the euro definitely facilitated the formation of its outrageous debt level. (So did investors, who failed to distinguish the credit risk between different Eurozone countries. Why would anyone think Greece was only a slightly less risky borrower than Germany?)
Now that we’re in a debt crisis, the euro is making matters somewhat more complicated. If Greece had tumbled into a debt and wasn’t a euro nation, we could speculate that its problems could have been more easily contained. The Greek crisis became a Europe crisis due to the common use of the euro. And being part of the Eurozone is making it much more painful for the debt-ridden nations of Europe to extricate themselves from the crisis. The euro prevents governments in the PIIGS from employing the standard policy of devaluing their currencies to become more competitive and restart growth, which will be crucial to the ultimate solution of their debt woes. With the euro in place, the PIIGS have no choice but to undertake some hard fiscal adjustments and structural reforms, such as liberalizing tightly wound labor markets and bringing down costs. That paints a potentially ugly picture, of long-term slow growth and falling wages and welfare.
Yet there is another way of looking at the same picture. A counter argument goes that the problem isn’t the euro itself, but the way in which the monetary union has been managed. If Greece, for example, hadn’t exceeded Eurozone caps on budget deficits and debt, or if the EU had enforced these rules, we wouldn’t be where we are today, We can also make the case that part of the problem with euro management has been flaws in overall Eurozone policy. Monetary policy within the Eurozone has effectively been run for strong, competitive countries like Germany, leaving its weaker, more vulnerable economies to suffer with a currency value at which they’re not as competitive. Granted, the European Central Bank is in an unenviable position, trying to devise a strategy for a zone with a vastly disparate group of economies. No one policy is appropriate for everybody. Yet its entrenched fear of inflation has made the ECB reluctant to use its power to help the zone’s struggling economies, and it has participated only very reluctantly in efforts to alleviate the current crisis. And the monetary union had no real mechanism in place to support weaker members who might be hurt by policies designed for the entire zone.
There is yet a third way of examining the relationship between the euro and Europe’s debt crisis – that there isn’t one. From this standpoint, the problems of a country like Greece are self-made, the result of economic mismanagement and embedded structural flaws – ill-functioning labor markets, poor competitiveness, and so on – that require fundamental reform. What currency people carry in their pockets doesn’t matter. If Greece had its own currency, devaluing it wouldn’t help much, since the economy is so uncompetitive that the country doesn’t produce much that the world wants to buy. The euro, then, simply gets a bad rap.
I have to admit to seeing merit in all of these arguments. Though it is impossible to absolve the euro and the management of the monetary union from some blame for the current crisis, I also think the focus on the euro is overblown. The fact is there are some very poorly run economies in Europe, and if they were better managed, we wouldn’t be in crisis today. In the end, the PIIGS have to take responsibility for themselves.