|Paul Krugman Source: New York Times|
Paul Krugman, the New York Times columnist, on Monday called the euro a Roach Motel which is — "a trap that's hard to escape" — and in recent years "Hotel California," the Eagles 1970s song with its lyrics, "You can checkout any time you like/ But you can never leave!" has been invoked during the euro crisis.
Krugman writes of "ultra-respectable men in Berlin, Paris, and Brussels, who have spent a quarter-century trying to run Europe on the basis of fantasy economics. To someone who didn’t know much economics, or chose to ignore awkward questions, establishing a unified European currency sounded like a great idea."
In December 2007 the United States economy entered into recession and since then 6 countries have joined the euro system and today there are 19 member countries from 28 members of the European Union — recent polls have shown that 7 out of 10 Greeks wished to retain the euro.
We have previously written of France using the unexpected opportunity of German unification to put pressure on the German government to agree to a single currency project — Helmut Kohl, the German chancellor, later said that he would have lost a referendum if the proposal to abandon the Deutsche Mark had been put to voters.
Krugman also writes: "And there is an arc of stagnation across the continent’s top: Finland is experiencing a depression comparable to that in southern Europe, and Denmark and the Netherlands are also doing very badly."
Finland is not experiencing a depression; Denmark has its own currency and the Netherlands has had a problem with housing debt, which in recent years pushed household debt up to 110% of GDP — the small country far from being a basket case is the world's second-biggest agri-foods exporter after the US and it is a leading innovation nation.
Neil Irwin of the New York Times in The Upshot section today reports from Finland and cites inflation-adjusted per-capita GDP growth from 1998 to 2008 in Germany and the United States at +17% in both countries; Finland's growth in the same period was +33%; Sweden's was +28% and France was at +15%.
In 2008-2014, Germany is up +5%; US up +4%; Sweden, which has its own currency, is up +1%; France down -1% and Finland is off -8%.
Finland has been hit by the demise of Nokia, the Chinese steel glut (China produces half the world's output), the fall in paper demand because of the switch to the Internet and EU sanctions on Russia.
Outsiders like Krugman and myself would need a much better knowledge of the Finnish economy to give a credible judgment on what would be the long-term benefit of a devaluation.
Despite positive and adverse currency changes in the period 1952-2014, Germany has posted a merchandise trade surplus every year.
If California was a country it would be the world's eight biggest economy and inflation-adjusted GDP per capita in 2014 was slightly below the 2007 level according to the Bureau of Economic Analysis. With a poverty rate of almost a quarter of the population, it is the highest in the nation.
This week the Economist's Schumpeter columnist writes on booming Texas which in 2014 grew at 5.2% — almost double the rate of California.
Whether it's California's 38 million population or Puerto Rico's 3.5 million, the transfer union does not mean the absence of austerity.
Per capita real GDP ranged from a high of $66,160 in Alaska to a low of $31,551 in Mississippi. Per capita real GDP for the US was $49,469 while the inflation-adjusted earnings of the typical American household in 2013 was below the 1989 level.
The economies of some states contracted in 2014.
There is a valid argument to be made about the extent of so-called consolidation in a struggling economy or austerity, but economist critics typically avoid addressing how they would have addressed a double-digit deficit following for example, a collapse in property-related revenues in Ireland following the bust or the discovery that Greek data had been faked and there was a big hole in the public finances?
Germany, France and Italy account for about two-thirds of Euro Area GDP and both France and Italy have had persistent budget deficits for 40 and 60 years respectively. At a time of poor growth prospects in the developed world and increasing ageing, dealing with high public debt levels when interest rates start rising will be daunting.
We have argued that that the taboo of exiting the single currency, which Jean-Claude Trichet, the then ECB president, used to call "inconceivable" when questioned in 2010 about Greece, should be replaced with the desire to have an orderly exit mechanism that a country could use in a crisis situation.
Martin Wolf, the FT chief economics commentator, wrote in 2011:
Nor, as so many suggest, is some sort of fiscal union the answer. True, if creditworthy members were to transfer resources to the uncreditworthy on a large enough scale, the Eurozone might be kept together. But, even if such a policy could be sustained (which is unlikely), it would turn southern Europe into a greater Mezzogiorno (Southern Italy). That would be a calamitous outcome of European monetary integration.
The fundamental challenge is not financing, but adjustment. Eurozone policymakers have long insisted that the balance of payments cannot matter inside a currency union. Indeed, it is a quasi-religious belief that only fiscal deficits matter: all other balances within the economy will equilibrate automatically. This is nonsense. By far the best predictor of subsequent difficulties were the pre-crisis external deficits, not the fiscal deficits."
Budget surpluses rare in developed countries from 1980s; Italy, France, Greece had none in 60 and 40 years
Greece was star economic performer in 1950-1973; Budget deficits every year since 1974
Greece and other poor countries in Euro Area will not become rich
Irish lessons for Greece on growing exports and investment
Irish standard of living in 2014 below Euro Area average, Italian level; Prices 5th highest in EU28