Does the Eurozone Have a Future?

In his last article at Project Syndicate Dani Rodrik is “thinking about the unthinkable” – does the eurozone have a future, at least in the current form and with its current members? After the bailouts of Greece and Ireland (and the looming ones of Spain, Portugal and Italy) it is a question that surely should be considered.

The fact is that both Greece and Ireland were not able to solve their problems caused by the global financial crisis by themselves. The other eurozone members saw themselves in front of two alternatives: either let them fail (i.e., endanger the own financial system and thus the real economy) or help them, either through a bailout or through debt restructuring (or both). It was clear that the latter will be chosen. (The potential opportunity of forcing Greece and/or Ireland out of the monetary union would have had a similar effect to letting them fail.)

But, as Rodrik points out, bailout and debt restructuring is only an intermediate solution. What these countries need in the long term is enhancing their competitiveness – otherwise their recovery will not sustain.

Here we come to the point where Rodrik’s question is fairly legitimate: is it possible for Greece, Ireland  – and probably the other PIGS as well – to enhance their competitiveness and thus recover (i.e., above all, lower their fiscal deficits in the long term and decrease unemployment) while being part of a monetary union that lacks political foundations?

So the real problem in Europe is not that Spain or Ireland has borrowed a lot, or that too much Spanish and Irish debt sits on banks balance sheets elsewhere in Europe. After all, who cares about Florida’s current-account deficit – or even knows what it amounts to? No, the real problem is that Europe has not created the union-wide institutions that an integrated financial market requires.

Then there is the problem of Germany dominating trade within the Union – it is literally flooding smaller European markets with highly competitive products. It is not to condemn Germans for doing it (producing high quality goods) well (although the fixation of its leading politicians on exports is a problem – not only within the EU but globally as well). But it is indeed very hard for others in the Union to compete with German (and French or British, for that matter) producers.

So, maybe Rodrik is right while concluding that a temporary exit from the eurozone may be inevitable for the PIGS-countries. However unthinkable this may be.

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