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Wednesday, July 11, 2012

Eichengreen: Europe’s Divided Visionaries

Back to the troubles in Europe:

Europe’s Divided Visionaries, by Barry Eichengreen, Commentary, Project Syndicate: ...Europe’s leaders now agree on a vision of what the EU should become: an economic and monetary union complemented by a banking union, a fiscal union, and a political union. ...
Vision aplenty. The problem is that there are two diametrically opposed approaches to implementing it. One strategy assumes that Europe ... cannot wait to inject capital into the banks. It must take immediate steps toward debt mutualization. It needs either the ECB or an expanded European Stability Mechanism to purchase distressed governments’ bonds today.   
Over time, according to this view, Europe could build the institutions needed to complement these policies. ... The other view is that to proceed with the new policies before the new institutions are in place would be reckless. ...
Europe has been here before – in the 1990’s, when the decision was taken to establish the euro. At that time, there were two schools of thought. One camp argued that it would be reckless to create a monetary union before economic policies had converged and institutional reforms were complete.
The other school, by contrast, worried that the existing monetary system was rigid, brittle, and prone to crisis. ... At the slight risk of overgeneralization, one can say that the first camp was made up mainly of northern Europeans, while the second was dominated by the south.
The 1992 exchange-rate crisis then tipped the balance. Once Europe’s exchange-rate system blew up, the southerners’ argument that Europe could not afford to postpone creating the euro carried the day.
The consequences have not been happy. Monetary union without banking, fiscal, and political union has been a disaster. But not proceeding would also have been a disaster. The 1992 crisis proved that the existing system was unstable. ...
Not proceeding now with bank recapitalization and government bond purchases would similarly lead to disaster. Europe thus finds itself in a familiar bind. The only way out is to accelerate the institution-building process significantly. Doing so will not be easy. But disaster does not wait.

    Posted by on Wednesday, July 11, 2012 at 07:11 AM in Economics, Financial System | Permalink  Comments (13)


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