Wednesday, January 18, 2012

Barry Eichengreen's summary of the euro crisis

Economist Barry Eichengreen gives a good summary description of the current euro crisis in the print edition of the Jan/Feb 2012 Foreign Affairs, "When Currencies Collapse: Will We Replay the 1930s or the 1970s?":

The eurozone is divided into a relatively vigorous northern tier with sound finances and a southern one with crushing debts and nonexistent growth prospects. Europe's indebtedness is no greater than the United States', but unlike the United States, Europe has no federal fiscal system to transfer resources from prosperous to troubled regions - and European leaders seem unwilling to create one. At the same time, they are hesitant to write down unsustainable debts for fear of destabilizing the banks that hold them. [my emphasis]

The bolded portion is what the financial jargon of "transfer union" means. Ironically, the transfer of income in the US "transfer union" geographically is largely from richer "blue" states like California and New York to "red" states like Mississippi and Alabama, where majorities of the voters elect representatives who want to cut back on transfers!

The result is that southern Europe has been left to implement brutal fiscal cuts that are pushing its economies deeper into recession, further impairing their capacity to service their debts. Many southern Europeans, suffering severe hardship, have rebelled against their own governments and accused northern Europe of sacrificing their well-being. Many northern Europeans, meanwhile, see their southern neighbors as spendthrift, lazy, and corrupt. Those northerners have become increasingly vocal in saying so and have concluded that more rescue operations would amount to pouring money down a rat hole. [my emphasis]
The all-round destructiveness of this cycle is hard to overstate.

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