At a Cato event on March 11 titled “The European Crisis Continues: No Solution in Sight,” Vaclav Klaus, who completed his second term as president of the Czech Republic last week and has joined Cato as distinguished senior fellow, and Uri Dadush, former consultant for McKinsey Europe who has also worked at the World Bank and is now director of the International Economics Program at the Carnegie Endowment for International Peace, presented competing visions of the future of the European Union.
The previous article
reported on Klaus’ speech. This article presents the rebuttal by Dadush, whose books include one with the provocative title Paradigm Lost.
Dadush covered four points in his statement:
1. Agrees that euro crisis is not over.
He agreed with Klaus that many years of slow growth, accompanied by high unemployment lie ahead for Europe. However, in support of the integration of Europe that Klaus dismissed in his speech as a misguided vision, Dadush emphasized that as one who did business in the European Union, it was very helpful not to have to juggle 17 different currencies, and for 10 years, the monetary union seemed to work.
Then the reality took hold that the conditions for a monetary union were absent, and perhaps the effort was 20 years too early. Now, Italy is reeling from an inconclusive election, and the economic situation is dire. Therefore, one or more countries might leave the euro, because the tail risk they pose has not gone away. The political platform on which European Central Bank President Mario Draghi is standing might be swept out from under him.
2. Disagrees that disassembling the European Union is rational given the cost.
Dadush argues that if Italy and Spain were to leave the euro, the result would be a financial shock equal to the Lehman Brothers debacle, but without the fiscal and monetary tools the U.S. authorities used to respond. This could unleash another Great Depression that we have so far avoided.
3. U.S. example points the way.
Dadush contended that the European Union could learn much from the way the United States has handled the crisis. It can see that the United States is in a gradual recovery and is no longer in a recession, while the European Union is still mired in one. The United States was able to deploy fiscal and monetary policy, whereas Europe was forced into austerity due to its inability to borrow, German resistance and the absence of a central government. In the United States, the Troubled Asset Relief Program and FDIC measures provided support and even made some money.
States like Florida, Arizona and Nevada suffered from aftershocks, but they are coming back, thanks to the automatic stabilizers, such as unemployment insurance, provided under the federal system. Furthermore, the American states never experienced a large decline in their competitiveness.
By contrast, the entire European periphery saw credit dry up, while Florida retained its triple-A rating and state government were sheltered from the crisis by federal arrangements and balanced budget requirements.
Thus, the United States has a large external debt that the eurozone doesn’t have, but the ability to devalue allows this debt to be carried, and both Japan and the United Kingdom have an even worse debt burden that the United States does.
4. European Union must take measures.
The implications of the crisis are fairly clear for Europeans and require both immediate and long-term responses. There is no viable alternative to fiscal austerity in the peripheral countries in order to restore their competitiveness through devaluation, but the pain can be reduced through structural reforms like those of the U.S. states.
The core countries of Europe could stimulate demand and allow their currencies to rise. Draghi has provided large injections of liquidity, and these need to remain. Institution building needs to proceed through the establishment of joint bank supervision, deposit insurance and mechanisms for bank rescues, unemployment insurance and infrastructure funds.
In conclusion, Dadush stated that he respects Klaus’ view, but remains a believer in deeper European integration.
Unfortunately, time did not permit an exploration of the extent to which the United States has slipped into the same habit as the Europeans of clinging to the objective of projecting institutions and ideas that need to be discarded under the principles espoused by the late Czech economist Joseph Schumpeter.
However, several years ago, in another speech at Cato, Klaus stated that he had become discouraged with the direction in which America was headed and no longer thought it as the best place for young people to go to make their fortunes.
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