Saving the Euro Might Be a Bad Idea

Something I’d like to make clear is that when I say that the German government’s propsal for a continent-wide austerity pact is neither necessary nor sufficient or that the correct way for a monetary union to work is with large open-ended transfers to the poor regions, I don’t mean to be recommending that German voters and politicians embrace this vision.

If I were a German voter—and even more so if I were Dutch or Finnish or Luxembourgeois—I would be really unenthusiastic about seeing my tax dollars redirected away from local public services and just kind of dumped on Italy and Portugal. If I were feeling charitably inclined, I’d say that my tax dollars should go to an actually poor country like India or El Salvador rather than a merely “poor compared to the rest of Europe” country. In the grand scheme of things, even lowly Greece has one of the world’s most successful economies, so as a charity case it’s not super compelling.

I just wish that Northern European politicians and public discourse could get clearer on what’s going on here. What’s unusual about the eurozone is not that it contains some backward regions that can only be kept afloat with persistent transfers. The United States is like that (coasts to the southeast), Germany is like that (west to the east), the U.K. is like that (the London area to the north), China is like that (the coasts to the interior), and even Canada has its perpetual laggards east of Ontario. There’s no sense in expecting that an adequate application of coercion, dirty looks, and signed agreements is going to change the fact that one section of Europe is richer and more productive than the other part. The basic political economy here seems to be that the German taxpayer hitches his fate to the economies of Southern Europe, and in exchange Germany “gets to” maintain currency competitiveness—i.e., low wages—with the rest of the continent. This is a very nice deal if you happen to own a German factory, but not otherwise.

Still, politics are complicated, and at the end of the day, it’s a political choice. Do Germans want to be in a democratically governed, integrated political unit with the Maltese and Estonians, or don’t they? If they do, then fine. If they don’t, then also fine. Europe’s long history of running separate currencies with managed exchange rates worked fine, and in many ways the euro is a solution in search of a problem. But they should look at what the options mean squarely. This idea that ratcheting up the level of budget-scolding makes the system work is nuts.