The Golden Euro

Not to be confused with The Golden Snitch…  Paul Krugman today aligns himself with the MMTers (Modern Monetary Theorists) in explaining why the Eurozone is failing so spectacularly and seems so incapable of coming up with a remedy.  He examines the two current narratives as to why the Eurozone is in trouble, one from America and one from Germany and finds both lacking.  The real solution lies in the work of the MMTers.

The American story, as promulgated by the various Republican candidates, but especially beloved by Mitt Romney, is that the overly generous social welfare states are responsible for the failure of the European economic system under the Euro.  Helping poor people is just too darn expensive.  It’s a nice narrative built on a conservative moral foundation (bootstraps and workhouses and all).  The trouble is, it’s an inconvenient fiction.

Did I mention that Sweden, which still has a very generous welfare state, is currently a star performer, with economic growth faster than that of any other wealthy nation?

But let’s do this systematically. Look at the 15 European nations currently using the euro (leaving Malta and Cyprus aside), and rank them by the percentage of G.D.P. they spent on social programs before the crisis. Do the troubled GIPSI nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No, they don’t; only Italy was in the top five, and even so its welfare state was smaller than Germany’s.

So that’s not it.  Helping poor people isn’t the cause.

What about the German story?  The Germans contend that it isn’t the welfare state, per se, that is to blame, but a catastrophic overall fiscal irresponsibility.  The Germans are a disciplined people.  They view their colleagues in the Eurozone as undisciplined spendthrifts who cannot control their unruly populations avaricious greed for more and more and more and more.  The German story is also a morality play, much like the GOP story.  Again, the trouble is, it isn’t true.

This story seems to fit Greece, but nobody else. Italy ran deficits in the years before the crisis, but they were only slightly larger than Germany’s (Italy’s large debt is a legacy from irresponsible policies many years ago). Portugal’s deficits were significantly smaller, while Spain and Ireland actually ran surpluses.

In other words, the Hellenization of our economic discourse, in which we’re all just a year or two of deficits from becoming another Greece, is completely off base.

If it’s not the welfare state and it’s not general fiscal irresponsibility, then what is it?  Cue the MMTers!

The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.

If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation.

The smartest thing FDR did was to decouple the dollar from gold convertibility.  It created a huge relief and unshackled the Federal Reserve, allowing it to create the necessary fiat currency to help America grow out of the Great Depression.

If the nations of the Eurozone were monetary sovereigns, they would have the tools necessary to re-adjust their economies to resume stable growth patterns.  But they don’t, so they can’t.  They’re trapped.

Paul Krugman is almost there in embracing MMT.  It would take just a gentle nudge to get him fully on-board.


Related Articles