Friday, December 31, 2010

Krugman's US-Euronomics

Consider this an info-dump of Nobel Prize winner Paul Krugman's latest postings at the New York Times. If this seems like something of an antidote to EurAmerican's atypically hawkish and euroskeptic posts from this week's Wall Street Journal, so much the better. Balance in partisanship -- that's what we like!

Krugman's pieces grow from the spark provided in this piece, also from the NYT, which takes the pulse of the current "we told you so" debate going on between Europe's solvents and debtors. It traces the germinations of the euroskeptic debate back to an obscure 1992 report from the Financial Times. In it the politologue Ed Balls observed a crucial and possibly disastrous difference between the nascent euro currency project and the environment of the US, another continent-wide monetary zone. The report concluded, to borrow the NYT piece's shorthand, that "Europe lacked the type of federal taxes and transfer payments used in the United States to ease economic divergences among its many states." 

Courtesy The New York Times

The NYT piece goes on to juxtapose prominent voices from the euroskeptic and the pro-EU antipodes. Speaking about the current troubles, Norman Lamont, the former Conservative chancellor of the exchequer, had this to say about the euro in the near future:

“I have always said that the euro will break up,” Mr. Lamont said in a recent interview. “Not after the first crisis today, but after the second crisis, which could be 10 years away. This is, after all a political project, not an economic project.” 
In contrast, Jerzy Buzek, the current head of the European Parliament, used with these words during December's opening of the Europe House, headquarters of the European Union delegation in London:

“We remember what happened in the last big crisis — it was something horrible, and such a threat is always waiting for us... Let us answer by having more solidarity. Overcoming history is an imperative for us.” 

It bears noting that Buzek's tone on the euro crisis -- which is far from finished ravaging great swathes of Europe and the world -- suggests that the "last big crisis,"  as he puts it, is already past, and belongs to history. These pictures provide a markedly more compelling argument that the euro crisis is both ongoing and far more serious the Buzek's seemingly clueless tone would indicate.
But back to Krugman: a recent blog post, titled simply "Euroskeptics," seeks to flesh out the pessimists' argument in more substantial terms. He harkens back to the research of some American economists who anticipated the pros and cons of currency merge by the original eurozone members. These economists' views were naturally comparative in style, given the federal and geographically massive nature of the US economic paradigm. Krugman says:

"In the early 90s a number of American economists tried to assess the proposed euro by comparing Europe to the best example we have of a working, continent-sized currency area: the United States. And what they all found was that Europe fell far short of the U.S. in terms of suitability: much less labor mobility, and no fiscal integration to speak of. [Economists] Jonung and Drea summarize this in hostile tones, as if [it] were a foolish notion refuted by events:
"To sum up, U.S. academic economists suggested that in light of the historical experience of U.S. monetary and fiscal union, Europe would face major adjustment problems under a single currency."
But that’s exactly what has happened.
What about those benefits from monetary integration? Jeff Frankel has a good piece on this: pre-euro work had suggested very large trade gains, but the actual experience has been much more modest — not nothing, but nothing like the high hopes some had for the euro.
So the academic euroskeptics have been proved right in their analysis. Now, that need not mean that the euro was a mistake: there were, after all, political economy considerations. And it certainly doesn’t have to mean that the thing should break up: doing that would be highly disruptive.
But there is, I think, a lesson here, namely that straightforward economic analysis has its virtues. Euro enthusiasts tended to be kind of cosmic about the whole thing, and dismissed the pedestrian cost-benefit approach taken by many US-based economists. Yet those costs and benefits did and do matter. And the crisis Europe is now having is very much the kind of thing those pedestrian analyses suggested was going to happen."
Krugman is himself no stranger to partisanship, economic or otherwise. (He named his blog quite plainly "The Conscience of a Liberal," meaning the American left). But he deserves a nod for his willingness to reproach euro enthusiasts, his own camp, with "cosmic" and unsupported positivism on the euro's future prospects. Those who had believed in the currency without having bothered to do the math would be well served to dust off their calculators, Krugman argues, so that a) a credible exit strategy can be formed and implemented, and b) the spectre of a second crisis, already warned of by Norman Lamont, can be best avoided in the future.

The comparative streak also runs through another of Krugman's posts, "Ireland = Nevada," comparing the two on their similarities in population, shock from the housing bubble-burst, unemployment rate (both about 14%) and other metrics. He expounds on his "optimum currency area" theory, in which

"... There are both benefits and costs to adopting a common currency. The benefit is reduced costs of doing business; the cost is that it’s harder to get your costs and prices back in line after “asymmetric shocks” — booms and slumps that affect some countries in a currency union but not others."
Watch this space for more on comparative EU US recession studies.