First of all, let me say I’m flattered to be invited to guest-blog on Fistful of Euros, which I’ve long thought was the coolest name of any blog ever.
I’d hazard a guess at two big reasons nobody has much to say about the security pact unraveling: First, there’s simply not that much to say at this moment beyond the bare facts of the case (although neither The Economist nor US bloggers Daniel Drezdner and Atrios have really captured the outrage that European editorialists have spewed at Paris and Berlin over this). The message from Germany and France is pretty clear: Do as we say, not as we do. End of story.
Second, this is a pretty difficult topic for a layperson (such as myself) to get his head around. Hence the usage of compact but vague phrases like “Europe Rips Up the Rulebook,” the headline given my recent press review on Slate covering this topic. (Feel free to read that if you want a review of the basic facts of the case from a non-economists’ perspective, plus a dose of what the European papers have said about the topic; but naturally I can’t compete with The Economist‘s coverage.)
So they tore up the rulebook. Seems a little back-to-basics is in order here: What was the rulebook for anyway? And what does this mean for the future of the euro?
Second question first. Oddly enough, you haven’t seen anybody predicting the beginning of the end for the euro. That’s a natural conclusion an economist might arrive at. Yet even the most hard-headed eggheads appreciate that the euro is a vast experiment into which European elites have already invested too much political capital to even think about letting it fail.
As for the rulebook, it’s worth harkening back to some of the arguments made for and against European Monetary Union back in the early 1990s. Through a friend who’s much smarter than me, I have a brief understanding of one of the more coherent — and understandable — arguments in that debate. The argument, made by an MIT professor named Rudi Dornbusch (who passed away last year), goes something like this:
Take a guy from Amarillo and a guy from Sausalito. They use the same currency, the almighty greenback. They can do this in large part for two reasons: the generousity of Uncle Sam and the affordability (and willingness to use) one-way U-Haul trucks.
If the economy tanks in Texas but stays relatively strong in California, having a common currency might be a problem, because a Texas dollar can’t be devalued to pump some life into the local economy. A dollar’s a dollar. Ditto for interest rates. But in the Unites States, this works because:
a) Washington is likely to even things out by taking some of California’s extra money and sending it to Texas. (A lot of this happens through so-called automatic stabilizers, like federal unemployment compensation, which kick in without politicians having to get their hands dirty.)
b) If things get really bad in Texas, people will pack up and move to California where the work is.
Now the question for the Europeans was (and remains) whether they can hold their currency union together without these two characteristics — federalized spending and inter-regional mobility. If there’s a huge recession in Portugal, are the Portuguese really going to move to where the jobs are in Germany? (Or vice versa?) How are the Germans going to feel about a flood of swarthy Iberians who don’t speaka the Deutsche invading their labor market? Or how are the Germans going to feel about a huge chunk of their tax dollars going to bail out the Portuguese economy?
This argument isn’t my own, but it’s through this prism through which I’ve always seen the euro project and stability pact. Basically, the pact says, you have your budget and we have our budget; you don’t overspend, we don’t overspend, the boat stays steady and nobody gets hurt.
It’s worth reading what Dornbusch himself said (it’s a PDF document) a few years later, after the euro, ready or not, actually arrived:
[T]he fact is, it did happen. The Maastricht criteria were a forceful mechanism to give governments a fresh argument against procrastination on fiscal laxness and casualness in anti-inflation policy. It worked and there was not even much cheating at the end. Those who said “impossible” (including this writer) were embarassed by those who did it.
If he were around today, I wonder how Dornbusch might reassess that evalation of “not even much cheating.”
We’ll see. The question is what, if anything, replaces this stability pact. It seems to me all the core European issues — eastward expansion, the federal question, the constitution, and how the eurozone and the ECB fits into the picture — will have to come to a head one of these days. But let’s be honest: the European political class specializes in muddling through and never letting anything come to a head. Taking the long view, not only is this sometimes a good thing, but I get the feeling it’s sort of the point of the whole European integration project.