Arnold Kling  

The State of the European Crisis

Squam Lake or Swamp?... Hypothetical Bargains...

Richard Baldwin and Daniel Gros introduce a set of essays on the crisis in the eurozone.

The authors unanimously believe that the crisis is not over, and that the Eurozone rescue is not finished. More needs to be done.

I have read a few of the essays, and I find them interesting but not very satisfying. I think that there are some larger issues. Again, to me the Euro is just a medium of exchange. The questions that I have are:

1. Does the crisis say anything about the viability of the European welfare state? That is, are Greece and Spain just anomalies with exceptional political problems, or are they the canaries in the coal mine? Will the political situations in France, Germany, and the Nordic countries deteriorate as demographic trends weaken their fiscal positions?

2. Are the unelected Eurocrats part of the solution or part of the problem? Can they provide political cover for policy makers in individual countries to undertake unpopular but necessary structural reforms? Or will they oversee bailouts and policies based on Keynesian assumptions in a Hayekian moment?

3. When it comes to financial system robustness, is the U.S. the tallest pygmy? For all the talk of "deregulation," the United States actually beefed up its regulation of safety and soundness after the S&L crisis. In addition, of all major countries, ours is the least dependent on a few big banks. Do European countries need major institutional changes to correct structural weaknesses in banking and finance?

4. Does the adoption of the Euro promote enough long-term efficiency to offset the short-term cyclical problems that it causes in some countries?

COMMENTS (6 to date)
David N. Welton writes:

The "European Welfare State" is in some ways a mythical beast in that it differs a great deal from country to country. I think that, culturally, there are also huge differences between, say, Portugal and Finland, which certainly have an impact on how things will work out.

Who knows for sure, but there are plenty of things to like about Europe, so my guess is that successful countries will continue to adapt and improve - they may ditch some aspects of their welfare states and adopt new ones. The problems start when things stagnate, like they appear to be doing in Italy as of late.

JPIrving writes:

reply to no.1
it seems to me the risk of crisis in France/Germany is far bigger than in Scandinavia.(finland may be be an exception due to demographics)

Norway has more money than God, and Sweden has near replacement birthrates, independent monetary policy, and most importantly, indexes new pensions to NGDP growth. I dont know the situation in Denmark but it wouldn't be surprising if they are in even better shape given their neoliberal reputation.

At any rate, since about 1990 economic problems in northern europe have been met with neoliberal reforms rather than begging and riots. Plus, for reforms, there is plenty of low hanging fruit left to give a nice supply side boost if the situation deteriorates.

Still, France is a crybaby welfare state, and Germany is in a demographic nose dive. If they both hit the wall it is hard to see that not dragging the rest of Europe and maybe even the world into crisis.

Ted Craig writes:

The real question is, does Greece combined with General Motors' bankruptcy raise questions about the viability of the welfare state?

John Alcorn writes:

Arnold, Alberto Alesina's short essay in the collection says that Germany must come to grips with "supply-side rigidities".

Yancey Ward writes:

While better than Germany, Sweden is definitely not near replacement fertility, but it has risen significantly in the last 5 year period (from 1.67 to 1.80- replacement is roughly 2.1)

JPIrving writes:

Yeah, I overstated my point. But still 1.8 aint bad!

It is something to work with anyway, and I think the younger 20something gernation is even more natalist. Unlike Germany which it is a lost cause.

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