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Thursday, May 06, 2010

Stiglitz and Rogoff on Europe's Financial Troubles

Here are two views of the situation in Europe. First, Joseph Stiglitz isn't sure the euro can survive, or that it should:

Can the Euro be Saved?, by Joseph E. Stiglitz, Commentary, Project Syndicate: The Greek financial crisis has put the very survival of the euro at stake. At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. What could replace them? ...
Some hoped that the Greek tragedy would convince policymakers that the euro cannot succeed without greater cooperation (including fiscal assistance). But Germany (and its Constitutional Court), partly following popular opinion, has opposed giving Greece the help that it needs. ...
For the EU’s smaller countries, the lesson is clear: if they do not reduce their budget deficits, there is a high risk of a speculative attack, with little hope for adequate assistance from their neighbors, at least not without painful and counterproductive pro-cyclical budgetary restraints. As European countries take these measures, their economies are likely to weaken – with unhappy consequences for the global recovery. ...
The social and economic consequences of the current arrangements should be unacceptable. Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago.
One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages. This, I believe, is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous. It is a fantasy.
There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. The euro was an interesting experiment, but ... it lacks the institutional support required to make it work.
There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms, including the necessary fiscal framework, that should have been made when the euro was launched.
It is not too late for Europe to implement these reforms and thus live up to the ideals, based on solidarity, that underlay the euro’s creation. But if Europe cannot do so, then perhaps it is better to admit failure and move on than to extract a high price in unemployment and human suffering in the name of a flawed economic model.

Next, Kenneth Rogoff on whether Greece and other countries will eventually default:

Europe finds the old rules still apply, by Kenneth Rogoff , Commentary, Financial Times: ...A recurring theme of my academic research with Carmen Reinhart is that “graduation” from emerging market status is a long, painful process that can take 75 years or more to complete. ...
The eurozone experiment was, in effect, an attempt to speed up the graduation process through the carrot of the single currency and the stick of harsher bail-out rules. Instead of having to demonstrate fortitude and commitment through decades of surpluses and declining public debt levels (as for example, Chile has done), euro members were allowed to have their cake and eat it, too. ... Greece could run up its public debt to more than 115 per cent of GDP. Even more stunning a figure is Greece’s total external debt to GDP, which is more than 170 per cent, counting both public and private debt. Prof Reinhart and I find that most emerging markets run into trouble at external debt levels of merely 60 per cent of GDP. ...
Is it realistic for the IMF and Europe to hope that Greece (and other struggling euro members) will survive without an eventual default? ... Unfortunately, “near misses” are the exception, not the rule. ...
Will Europe’s crisis end only in “near misses” rather than outright defaults or reschedulings? The answer involves a range of political, social and economic questions that are not easily quantifiable. ... It is very rare for a country to default because it literally cannot pay. In most cases, and certainly in southern Europe today, the issue is willingness to pay. ...
In the case of Europe, the decision to repay involves not only the usual costs and benefits, but also the added question of how a nation’s status in the European Union will be affected. Is Europe prepared to go to great pains to punish Greece if it defaults, imposing costs much higher than those a non-euro country would face? If not, how can it seriously expect Greece to pay down debt levels far in excess of those navigated by almost any other large emerging market?
In our book on financial history, Prof Reinhart and I find that international banking crises are almost invariably followed by sovereign debt crises. Will the euro prove to be a firewall against this process, or a debt machine that fuels it? It is going to be extremely difficult for some of the peripheral eurozone economies to escape without large-scale defaults on their massive private external debts, public external debts, or both.

    Posted by on Thursday, May 6, 2010 at 01:26 AM in Economics, International Finance | Permalink  Comments (99)


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