Beware of Greeks Bearing Euros: A Critique of Krugman and the European Crisis

by Matthew Sanyour ’11

Greece is in serious economic trouble – there is virtual unanimity of opinion upon that point among liberals and conservatives alike.  The Greek government has been horrendously irresponsible; the creative accounting practices that Athens has been using to hide its growing profligacy from Brussels in violation of EU economic guidelines are enough to make Adam Smith roll over in his grave.  Were Greece a private corporation, it would probably be facing bankruptcy, possibly even liquidation, and its financial ministers would almost certainly be subject to charges of fraud – the Enron of the Aegean.

The Greek government flaunted the economic standards of the euro zone, but successfully hid its numerous violations from EU authorities until this year.  For instance, euro economies must restrict their deficits to 3% of GDP, but perfidious accounting practices allowed Greek debt to exceed 120% of GDP before the government fraud was exposed.  Greece may only be the tip of the iceberg, as other shaky euro zone members, including Portugal and Spain, have seen public debt rise as their economies and tax revenues have withered as a result of the global recession and a particularly debilitating housing market collapse.  In spite of the deteriorating situation, euro zone economic leaders France and Germany have been reluctant to alleviate the ailing Mediterranean economies.  Instead, they have been content to watch the euro slide, evidently banking on the fact that a weaker currency means stronger exports.  Thus, the shared currency may actually be deterring Greece’s wealthy neighbors from lending a helping hand rather than encouraging them.

For conservatives, Greece’s fiscal problems and the fall of the euro are directly attributable to a toxic combination of unrestrained government spending and the shocking revelation of fraudulent accounting practices.  On the other hand, liberals committed to defending deficit spending at all costs, like Princeton’s own Paul Krugman in his recent op-ed in the New York Times, claim that “the lack of financial discipline isn’t the whole or even the main source of Europe’s troubles,” but rather due to the fact that the EU – in contrast to the US – is still a union of sovereign states, and therefore is sorely in need of a centralized political authority that plays a role akin to that of the federal government in the US.  Pay no attention to that massive public debt behind the Keynesian curtain, friends: Dr. Krugman assures us that Europe’s fiscal problems are primarily political.

The political explanation is deceptively simple, simplistically even, and echoes the warnings from German economists who opposed the adoption of euro back in 1999 on similar grounds – that the smaller, poorer countries would not mend their irresponsible ways and stalwart Germany would end up footing the bill.  At the time, the German economy was just recovering from the 1989 reunification with the formerly communist East Germany, and many Germans were reluctant to see their liability expanded yet again.  Krugman and company would have us believe that the skeptics of ‘99 were right and the intervening decade of economic growth under the euro since that prediction, despite the lack of political union, was just beginner’s luck.  In order to accept Krugman’s hypothesis, we must conveniently ignore the huge benefits Europe’s large export economies, Germany chief among them, have reaped from the free flow of goods and capital that only a currency union, more than even free trade zones, provides.

While it is undeniably true that Greece failed to reform its spendthrift ways after joining the euro zone, the fact is that the benefits Germany and France have accrued greatly outweigh the costs of this crisis.  Right now, Greece is in trouble, but it also small.  The Franco-German authorities can afford to bail it out if they so choose, or, alternatively, can allow Greece to flounder without destroying the euro.  Faced with a money shortage and without the ability to summarily revalue its currency as it did in its pre-euro past, Greece will massively cut costs and get responsible, as Ireland has attempted to do, or languish until it does.  It remains to be seen, but in all likelihood the euro could even withstand more minor crises in Portugal and Spain as long as the Franco-German core remains intact.  In fact, a sustained but moderate downturn in Southern Europe, with the resultant depreciation of the euro, could be just the economic tonic that Germany, and, to a lesser extent, France, need to drive their exports and capture market share as world demand rebounds.  A cheap euro will give European manufacturers a much-needed edge in winning customers abroad.

Obviously, this is a potentially dangerous game to play, withholding financial relief from Greece and Iberia to preserve Berlin’s budgetary rigor, but as long as they avoid total collapse, the Euro-exporters stand to gain enormously.  China has been consistently undervaluing its currency for the past decade, during which time it gobbled up market share in low-end manufacturing.  This lesson has not been lost on Germany’s high-end manufacturers.  In fact, German reluctance to bail out the Mediterranean malefactors may be motivated in part by desire to stimulate exports by allowing the euro to depreciate against the other large currencies without appearing to do so intentionally.  The euro has already lost about 10% of its value against the US dollar since the start of this year, a great boon to already powerful German industrial exporters.  Germany is second only to China in annual exports, and was only surpassed by the Chinese in the fiscal year 2009; the growth of the German economy continues to depend upon its competitiveness abroad.

The Greek crisis has stimulated German trade in the same way that an artificially induced devaluation would, but without the ensuing political fallout that a deliberate policy would bring.  Greece will have problems into the foreseeable future, especially if France and Germany refuse to endorse a bailout entirely, or only offer up a pittance, but this matters far less than it would if Europe were a full-blown federal union, as Krugman advocates.  As the euro zone is currently constituted, the EU states, despite the common currency, still issue their own government-specific bonds.  While investors will certainly shy away from Greek debt, Germany remains eminently creditworthy.  Thus, the Germans reap the benefit of a devalued currency while retaining their stellar credit rating.

Krugman’s political critique doesn’t merely fail to fully explain the problem and the motivations of the major players involved, it also offers only one way forward for Europe; devolution of political sovereignty from elected national governments to a central regime.  Although it is certainly refreshing to see Krugman praising the American system for a change, albeit backhandedly, his ersatz Americanism is misplaced; the Europe Union does not need to become another United States.  Indeed, it is dubious that Europeans could achieve that level of integration in the foreseeable future, even if they wanted to, which, judging by the opt-out provisions that accompanied the ratification of the Lisbon Treaty and the utter failure of the proposed EU constitution, they clearly do not.

Moreover, there is virtually no chance that Berlin or Paris would be willing to cede authority to Brussels, least of all while staring down an economic crisis.  Voters are demanding action from their representatives in the Bundestag and the Assemblée nationale, not the currently impotent European Parliament.  With its plethora of committed opponents of European integration, unwieldy procedures, and absence of political muscle, the international body has little chance of displacing the national legislatures anytime soon.  As one can see from Franco-German policy in this crisis, when the chips are down, national economic interests continue to trump EU integration.

In the absence of an elected, Pan-European legislature with meaningful authority built along the lines of the US Congress, the political sublimation of the nations of Europe to the EU would mean placing not just the power of currency regulation, but control over broader economic policy into the hands of the so-called Eurocrats in Brussels.  An unelected technocracy may be tolerable for the uncontroversial and workmanlike task of keeping inflation in check, but for the EU to have control of such economic tools as taxation and labor regulation, as Krugman suggests, would place enormous authority into the hands of a cohort of politically unaccountable appointed officials.  The prospect of such power falling to the current undemocratic authorities understandably makes many Europeans deeply uneasy, and with good reason.

Nevertheless, although national sovereignty endures, the European economy is already integrated – the euro is an all-but-irrevocable economic fact for over 400 million people, divided by ancient differences in language, culture, and politics.  The lesson of Europe is that it is far easier, and sometimes far more practical, to share a currency rather than a state.  Thus, for the time being, Europe will remain a politically multifarious but economically unified market, one that will continue to compete credibly with the United States in exporting high-tech goods and services.  Europe does not necessarily need a central government in order to compete globally.  In fact there are times when the discretion of withholding aid, rather than the rote federal payouts of a unified state, may even be more beneficial to the economic wellbeing of its leading members, and allow them to lead the way out of the downturn all the sooner.

The lesson of this crisis to smaller, less developed economies with enduring spendthrift policies will be to adapt to the reality of the shared currency or suffer the fate of Greece.  In light of these facts, it is unlikely that Germany or France will offer Greece a generous rescue package, and even less likely that this crisis will motivate support for Krugman’s ill-conceived call for greater European political integration. For now and into the foreseeable future, the European Union will remain a grouping of sovereign states.

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