Fiscal restraints are not enough to solve euro crisis

Eight economists explain the origins of the euro crisis and look at what would happen if the currency were abolished

JOSEPH STIGLITZ

I don’t doubt the commitment of Europe’s leaders to preserve the euro. But there a lack of understanding of what is required and/or a willingness to do what is required, either for ideological or political reasons. These leaders must know that austerity by itself will restore neither growth nor confidence. They must know that even if strong fiscal constraints might prevent the next crisis, they don’t solve the current one. And they must know that, as desirable as the structural reforms that are being discussed may be, they are supply-side measures when the problem in many of these countries is inadequate demand, and the time horizon required for their implementation is out of sync.

In short, the policy framework on which Europe is embarked — unless accompanied by additional measures that mitigate the risk of default and enhance growth — is more likely to fail than to succeed. When will the political leaders recognise this and take the necessary actions?

— Stiglitz won the Nobel Prize in Economics in 2001

JAGDISH BHAGWATI

It is a tragedy of hubris. It started in Greece, prematurely some days before Dionysia, the traditional festival that is popular for its performance of Greek tragedies. But it caught up rapidly. Greece had a huge stock problem of debt overhang. But its main problem was its gargantuan current deficit.

The IMF is the agency that has the unpleasant task of getting nations to tighten their belts while easing the pain by providing temporary adjustment funds. I was among the few who argued that the EU must let the IMF do this unpleasant job. But the EU felt that calling in the IMF was undignified. And so the tragedy began. Germany, rather than the IMF, is now the enemy of the Greek people; contagion has spread to others who are caught up in the rising panic. We used to say that Turkey was the “sick man of Europe”. Then Greece became that. Now Europe is almost the sick man of Europe. — Bhagwati is professor of economics at Columbia University

GARY BECKER

The euro crisis is mainly concentrated in five or so countries. If you look at it in comparison, it isn’t that these countries, for the most part, have the highest debt-to-GDP ratios or the highest deficits — although some of them do — but they were all mainly importing a lot more than they export. They were basically not very competitive. And I think that led to borrowing and the debt issues and so on.

— Becker won the Nobel Prize in Economics in 1992

ROBERT E RUBIN

The eurozone had an inherently flawed structure — with a common currency and monetary policy but national fiscal systems — that contributed in multiple ways to the crisis. Moreover, the market never appropriately evaluated the relative credit worthiness of the various eurozone-country bonds, thus failing to provide discipline on national fiscal policies. Eurozone leaders have been consistently behind the curve and could well have avoided crisis by dealing with Greece when trouble began. Effective measures could have been taken at every stage of the crisis, but the political will was lacking.

European Central Bank liquidity measures buy time, but the fundamental problems still remain, including reform to promote growth. The eurozone cannot be partly or fully dissolved without severe effects, though firewalls could limit damage. The eurozone’s growth and stability pact required fiscal discipline but had no effective enforcement mechanism to overcome national sovereignty.

— Rubin, former US Treasury secretary, is co-chairman of the Council on Foreign Relations

GLENN HUBBARD

When you have a currency union but you don’t have a fiscal union, you lose your flexibility. Germany got a big benefit in competitiveness terms from the euro.It got an undervalued exchange rate, and Greece got an overvalued exchange rate. But this created account imbalances. Another component is banking and financial regulation. There were no capital requirements, so you have banks that were heavily invested in this debt, much of which has to be restructured.

— Hubbard is dean of Columbia University Business School

ROBERT MUNDELL

The Treaty of Maastricht put down some clear-cut conditions but they were not maintained. Countries were given a pass, countries like Italy and Greece — the requirements were 60% of debt to GDP; they had 120% or 110% when they went in. There was no emphasis on getting the debt ratios down over the period. So it was a big flop in carrying through the fiscal discipline. And the growth and stability pact didn’t have any authority behind it, because even the biggest and most stable country was violating the pact, too, back in 2002.

If the euro vanished, it would be terrible for Europe and, I think, very bad for the rest of the world. It would be a terrible calamity for the US and North America.

— Mundell won the Nobel Prize in Economics in 1999

JOSEF ACKERMANN

This crisis, if not quickly solved, threatens to severely undermine trust in the common currency. We need decisive action, such as sustained and reliable budget-consolidation efforts, structural reforms to improve competitiveness on the national level, and institutional reforms on European level, to prevent a repeat of a similar crisis in the future.

We have to reinvent the monetary union and provide it with the institutional architecture that we failed to establish at its start.

— Ackermann is the chief executive of Deutsche Bank

DANI RODRIK

The monetary union should have been a stepping stone to a fuller fiscal and political union.

The financial crisis that emanated from the US exposed the instability of the eurozone’s prevailing arrangements. The crisis was then made substantially worse by Germany’s insistence on austerity policies and the ECB’s refusal to play a more active role.

The eurozone would have been fine for decades if it had not been hit with the aftermath of the US financial crisis.

— Rodrik is a professor of international political economy at Harvard University

* (c) 2012 Newsweek/Daily Beast

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