Break the eurozone consensus

In: Uncategorized

29 Aug 2014

While most of you were off on your summer holidays the world’s top economic policymakers were up to something else. Although they enjoyed more salubrious surroundings than many they kept busy doing what they do best: blaming others for the economic mess they have played a key part in creating.

The summer’s top gig was the annual do for top financial types in at therustic resort of Jackson Hole in Wyoming. Its use as the event’s venue dates back to 1982 when it was evidently chosen to entice Paul Volcker, then chairman of America’s Federal Reserve, with its excellent fly fishing.

This year it was the turn of an Italian, Mario Draghi, to star. The president of the European Central Bank told the select audience that: “it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy”. In other words an area of policy outside his own remit should be used more actively.

He also emphasised the need for structural reforms. In particular he focused on labour markets, product markets and the business environment.

His call came shortly after Eurostat, the EU’s statistical agency, released miserableflash estimates for economic growth in the second quarter of 2014. It showed GDP in the eurozone was flat compared with the previous quarter. The poor performance comes several years after the emergence of the eurozone crisis in 2009.

It is striking that technocrats such as Draghi seldom accept any responsibility for the region’s morass. The fundamental structural weakness of the eurozone itself – that is its attempt to tie highly disparate economies into a monetary union – is not addressed. If anything the solution is seen as further integration – under the leadership of elite technocrats of course – rather than the dissolution of the currency bloc.

As I argued in a Fund Strategy cover story back in 2010 the eurozone is a bit like a layer cake. Its members exist on three levels: national, regional and global. Whereas all countries are subject to global problems, and all have national weaknesses to a degree, the design of the eurozone poses formidable additional challenges.

The structure of the eurozone inevitably leads to imbalances between the relatively strong economies, most notably Germany, and weaker ones, such as Greece and Portugal. Until 2009 these helped create a bubble in the region’s periphery, as cheap capital flowed into southern Europe, followed by savage austerity when the bubble burst.

A unified economy, such as the US, can deal with these problems by shifting resources from one area to another. However, this is a difficult process in Europe as it still consists of distinct nation states.

To be sure this design weakness is not all the fault of Draghi. The region’s politicians should take most of the blame. Rather than take responsibility for tackling economic problems they preferred instead to abdicate responsibility to central bankers and other unelected technocrats.

Meanwhile, in Lindau, a Bavarian town on the banks of Lake Constance, the fifth annual meeting of Nobel laureates in economics also took place in August. Although several were critical of the eurozone their perspective was not that different from Draghi’s. Joseph Stiglitz, for example, called for further moves towards in integrated Europe and a more active fiscal policy.

Both the policymakers and the supposed critics seem to share the same deadening technocratic consensus on the challenges facing the eurozone. It is high time that a new approach is tried.

This blog post was first published today on Fundweb

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