Eduardo Porter
ECONOMIC SCENE
The euro had been enshrined in a treaty but not yet come to life in the autumn of 1997, when Martin Feldstein, the influential president of the National Bureau of Economic Research, published an essay arguing that European leaders’ hopes that a monetary union would foster greater harmony and peace in a Continent repeatedly ravaged by wars were misplaced.
It “would be more likely to lead to increased conflicts,” wrote Mr. Feldstein, a former chief economic adviser to President Ronald Reagan.
War within Europe, “would be abhorrent but not impossible,” he added. “The conflicts over economic policies and interference with national sovereignty could reinforce longstanding animosities based on history, nationality and religion.”
Needless to say, Mr. Feldstein’s sobering forecast was widely derided in Europe and even treated as beyond the pale by a number of economic commentators in the United States, including the editorial board of The Wall Street Journal.
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It doesn’t look so outrageous these days. True, not all of his observations hit the bull’s-eye. He expected Europe’s monetary union to proceed toward deeper unification, including a common foreign and defense policy, and even a unified military. Interestingly, he feared a more assertive Europe might go to war with Russia if it were to invade Ukraine.
Forced to accept tough austerity measures to raise money for their debt payments, countries along the periphery of the eurozone have fallen into a deep economic downturn. But with economic activity crimped, their debt load has increased rather than lessened.
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And that sets the political constraint on the other end of the field. “The right policies would defuse the political crisis in the peripheral countries at the expense of intensifying it in Germany,” Mr. De Grauwe said. “It would prevent communists taking over in the south but would fuel the extreme right in the north.”
The eurozone might have been built differently. Simon Wren-Lewis of Oxford University argues that had governments been allowed to employ countercyclical fiscal policy — tightening budgets when the economy was expanding robustly and actively spending more when economies slowed — much of the present crisis could have been avoided.
Germany’s obsession with budget deficits prevailed, however.
That leaves the ball entirely in the court of the European Central Bank, which is institutionally sheltered from popular democracy, though certainly not unaware of the political environment.
The E.C.B. has kept the euro from collapsing over the last two years by acting as lender of last resort to its weakest members. It now hopes to stimulate growth through quantitative easing, buying up bonds to reduce long-term interest rates, much as the Federal Reserve has done in the United States.
But bond-buying, Mr. Feldstein argues, will have little impact. Long-term interest rates are already low.
Few other options fit within the political constraints.
Mr. Frankel suggests that the central bank buy United States Treasury securities, which would further devalue the euro and stimulate euro area exports. Mr. Feldstein proposes revenue-neutral tax incentives: accelerated depreciation of new investment, say, accompanied by higher corporate taxes. Governments might commit to future increases in the value-added tax tied to reductions in the income tax, to accelerate spending.
Could these ideas pull Europe from its morass? Perhaps, but the latest academic proposals seem a bit like clutching at straws. “They might not try it, or it might not work,” conceded Mr. Feldstein. “If so, there may be no solution to the euro crisis.”
What then? In a recent column, the Financial Times economist Martin Wolf argued that creating the eurozone was its members’ second-worst idea. Letting it break up would be the worst. If the euro is to survive, voters in not just Greece and Spain but most of all those in Germany and the Netherlands must be persuaded of the necessity of compromise. Nothing we’ve seen so far suggests they are.
Email: eporter@nytimes.com; Twitter: @portereduardo
