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More success than failure

22 July 2015 By Edward Hadas

Ben Bernanke is the latest prominent economist to pass negative judgment on the euro zone. Writing in his new capacity as Distinguished Fellow at the Brookings Institution, the former U.S. Federal Reserve chairman’s complaints are financial. He reckons the zone is suffering because its monetary and fiscal policies are too timid. Inadequate efforts, he says, are being made to restore confidence in the banking system.

He is making too big a deal about some modest differences. Europeans may talk more about austerity, but they, like the Americans, ran hefty government deficits after the 2008 financial crisis. Both deficits have since declined, the euro zone at a slower, less austere pace. The two approaches to monetary policy are also similar. At the beginning, the Americans were more aggressive, but there is now almost no difference.

Bernanke is closer to the mark in saying that euro zone banks were held back by inadequate capital and official support. It has taken time, yet even here it looks like the corner is finally being turned.

Bernanke’s analysis misses the principal cause of the euro zone’s painfully slow recovery. That is the deeply ingrained asymmetry of the labour market. During and after the financial and euro zone crises, European employers lowered headcounts because they felt they had to. The euro zone unemployment rate increased steadily from 7.2 percent in early 2008 to 12.1 percent in April 2013. As the crisis (absent Greece) abated, employers have shied away from creating new positions, often discouraged by intrusive regulation, high labour taxes and expensive benefits. The euro zone unemployment rate has only fallen to 11.1 percent.

Many of Bernanke’s economist peers on both sides of the Atlantic use the deep recession and slow recovery to attack the whole idea of a single European currency. They argue that the member states’ diverse economic situations and fiscal policies cannot be united with the European Central Bank’s single monetary policy. The Greek mess, they say, is a symptom of this structural impossibility.

The former Fed chairman is less strident. But it is undoubtedly true that the euro arrangement can only succeed if governments are willing to subsidise each other’s finances or allow some sovereign defaults. Although neither is permitted in principle, in practice both take place. Government money already moves across borders, both through European Union funds and through more indirect subsidies and payments. As for defaults, the real value of Greek debts has already been reduced substantially through more generous terms.

Even if the euro zone economy continues to struggle to create enough jobs or promote enough innovation, the euro can survive, or even thrive. It only requires a Europe that is sufficiently united, politically and culturally, to support it with cogent monetary and fiscal policy.

Most voters are optimistic on the single currency. Despite a long recession and a dismal recovery, parties which advocate leaving have never received more than a quarter of the vote in any country. Even in depressed Greece, a clear majority puts more trust in European rules than in domestic politicians.

Such thinking is reasonable. Currency dependence has significant advantages. With the euro, the government in Athens cannot borrow wildly, as it might with a renewed drachma. Instead, it has to appease creditors by making economic policy changes which mostly promise to be helpful in due course.

Greece is not alone. Despite the excesses in the credit market and the limits on national fiscal and monetary sovereignty, the fiscal discipline and shared expertise which came with prospective and actual currency dependence have probably on balance been good for the economies of France, Spain and Italy.

More important, the euro project supports many of the most helpful aspects of European unity. Debates over monetary and fiscal policy – if they end in agreement and action – help forge a valuable shared regional consciousness.

The common vision promotes many good things. It tempers mutually destructive nationalism, the original motivation for what has become the EU. A unified approach to international affairs can have far more weight than any individual European country.

Less tangibly, pan-European structures express a fundamental truth about the region. The common heritages of classical civilisation, Christianity and the Enlightenment have given the people of Europe deeper cultural ties than the residents of China and India. The light sovereignty of the European community should be a welcome complement to the many nations and regions.

Since World War Two, Europe has taken determined steps towards true community. Yes, progress has come through many trials and many errors. The inadequate design of the euro is the latest. In typical confused style, European leaders are only now trying to dig foundations adequate to support the currency edifice that already exists.

Bernanke may be right that the euro planning failure has cost the region in GDP and jobs. But the losses are a small price to pay for ultimate rewards, both economic and cultural, which a successful transnational currency can bring.


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