Arnold Kling  

Why the European Bailouts?

Morning Recommendations... Charter Cities vs. Anti-Foreig...

The Daily Mail reports,

Democracy could 'collapse' in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned.

That is actually a better story than the more common one, which is that the bailout is needed to "save the Euro."

The Euro is a medium of exchange. It is very useful, as I was reminded on our recent trip to Europe. But I fail to see the connection between the bailouts and the common currency.

The Club Med countries have large fiscal imbalances. I think of that as an internal political problem. Whether or not the countries use the Euro as a medium of exchange is not the issue. Perhaps at this point Greece wishes that its debt were denominated in a currency that it could print. But that is unlikely to be the case in any event. Suppose that Greece were using the drachma as a medium of exchange. Would foreign lenders have been lending to Greece in drachmas or in Euros? My bet is with the latter.

The Club Med countries have wages that are high relative to competitive levels. This is a problem of sorts, but I think of it as mostly unrelated to the debt crisis. Using the Euro as a medium of exchange may make it more difficult to adjust relative wages. However, I do not see that as the primary issue. I see the primary issue as fiscal imbalances.

My view of the bailouts is that they are primarily to save French and German banks. All the talk about "saving the Euro" is a smokescreen.

I find it ironic to have an EU official warning about the collapse of democracy. The eurocracy is a very undemocratic organization, chronically in conflict with popular opinion. The bailouts are unpopular, and quite properly so. Any official who claims that that the bailouts should be undertaken in the name of democracy is a poseur.

Comments and Sharing

COMMENTS (8 to date)
Sam Schulman writes:

You are the first commentator I've seen to note that the EU and the Euro project had nothing to do with democracy, was shielded from the democratic process at every step of the way, and is a creature that should matter only to the autocrats who designed it (except of course for the collateral damage that it creates for the peoples who have been subjected to it). Well done.

John Alcorn writes:

Arnold, You're on a roll since vacation! Sharp post. Keep 'em comin'.

Gu Si Fang writes:

"I fail to see the connection between the bailouts and the common currency."

I absolutely agree. It was puzzling to hear so many commentators urging the european governments to bail out the greek government in order to "save the euro".

The only connection I see is that the ECB buys greek bonds on the secondary market or takes them as collateral (so long as they are AAA, that is...). This creates a moral hazard, as does the fact that a small country can leverage its banks like crazy, counting on the big central bank to save it. In other words, the euro creates a moral hazard situation, a prisoners' dilemma situation where irresponsible governments are rewarded. That's nothing new.

Jeremy, Alabama writes:

"My view of the bailouts is that they are primarily to save French and German banks."

This is your insider/outsider narrative applied to the Eurozone.

Lars P writes:

Interesting, but completely misses Barroso's point.

He's simply saying that these countries may revert back to military/fascist dictatorships if things get too tough.

Seems unlikely but not unthinkable to me.

Philo writes:

"I see the primary issue as fiscal imbalances." By 'fiscal imbalance' I think you mean *deficit*. Why do you prefer the more cumbersome term? (And wouldn't a *surplus* also be an "imbalance"?)

Ted writes:

A few points.

(i) There is a connection between a common currency and the bailouts. One based around self-interest, another around politics, and another around ego. The self-interest angle corresponds to two reasons. Firstly, Other nations (primarily Germany) don't want a run on their banks. Secondly, other nations do not want a speculative attack on the Euro, particularly a second-generation attack (out of fear countries will depart the Euro in harsh times). The political-based interest is that the Euro is also a political union and I believe they feel almost indebted to helping a fellow Euro country. Which gets to the ego-based point. If they let a few countries fail because they have the Euro, then the European elites must admit the Euro was a failed experiment - something they are unlikely to admit out of hubris.

(ii) You really don't understand the issues with the Euro. The issue of how the debt was denominated is not the key problem. It's a problem, but would be a manageable one in a Greece with their own currency. Greece's debt problems are substantial, but they wouldn't be insurmountable if they had their own currency. If Greece's growth prospects over the coming years were higher they could service the debt and have gradual fiscal contraction. The problem is, they aren't going to have good growth over the next decade. Why? Because the ECB monetary policy is way too tight relative to Greece's economy. If Greece had their own currency they could engage in expansionary monetary policy by devaluing their currency. That would push up inflation expectations, increase competitiveness and increase exports. But they can't do that because they lack their own currency. If they had control over their own monetary policy, Greece would be in much, much better shape and likely wouldn't need any external support of any kind.

(iii) I don't think democracy would end in any of those countries, even with a crisis - but I suppose it's possible and I see no problem citing that as one possible reason of several others that have been cited. The EU is undemocratic in some sense, but it's hardily ending democracy in Europe. Member countries still have strong autonomy.

Arnold Kling writes:

I use "fiscal imbalance" not to be polite but to be more general than deficit. The current deficit in Medicare is not a big issue. The fiscal imbalance represented by future Medicare benefits that we will not be able to afford is a big issue.

Comments for this entry have been closed
Return to top