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Points of view: How fragile is the euro?

September 27, 2012
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The European financial crisis is one of the most serious issues in the news. It’s also one of the most complex. So it was helpful to listen to Jim Adams explain how Europe got into the mess and what the future may hold in his recent talk – “How fragile is the euro?” – sponsored by the Center for European Studies.

Adams, winner of numerous prizes for teaching,  is a professor of economics at the University of Michigan whose research has  ranged broadly, from public policies toward business in the U.S. to economic integration in Europe. He has advised the Federal Trade Commission,  the U.S. Ambassador to France and several foreign policy departments of the U.S. government.

Here are a few excerpts from his speech and the video of the entire lecture:

What are some of the historical roots of Europe’s financial crisis?

During the third quarter of the 20th century, Europe was experiencing a period known as “golden growth.” There was very rapid growth of GDP. There was very, very low unemployment. Think of it this way, between 1959 and 1974, the unemployment in France was about 3 percent. The unemployment rate in Germany was about 3 percent. Life was good. Things were going along very well. And in connection with that very strong macroeconomic performance came a lot of ambition to create a very beneficent and munificent society, the growth of the welfare state. Governments were playing an active role in the improvement of the welfare of individual citizens based on the fact that the pie is growing and there seems to be enough pie to do a lot of different things.

Then what happens is that around the mid 1970s – you can associate this with the first oil shock if you want to but there are other causes as well – you begin to find that growth in Europe slows down appreciably. Initially, the thought was that this slowdown was really temporary, that it was a question of business cycles rather than a long-term change in prospect. As a result, the ambitions for the welfare state, the ambitions for other uses of government continued, even though the government revenues were substantially diminished because of the slow growth. And as a result, beginning in the mid 70s, you find a very slow but perceptible growth in budget deficits, or accumulative government debt that was occurring in the European setting. That gradually accumulated over time.

Just how fragile is the euro? Is it terminal? Will it disappear?

I wouldn’t bet against the very existence of the euro. It’s possible that there is going to be some countries that will not forever be part of the euro. Greece. But will the euro disappear entirely? My view is that it’s highly unlikely and the reason why it’s highly unlikely isn’t because a few people wished upon a star but because it’s not in the interest of the major players for it to disappear. By the major players, I don’t mean governments. I mean the German industrial community and the German banking community. I mean the French economic community and so on. None of these players would really want this to disappear. Will there be bargaining about what the content of euro policy and the reaction to euro problems? Of course because someone is going to have to pay to clean up the mess and there will be bargaining about who has to pay what. But does that mean  at the end of the day there is not going to be an agreement? I think not. I think there will be a euro. So if what you mean by fragile is disappear without a trace, the Titanic of the international monetary landscape. No, I don’t think that’s where we’re heading.

Will Europe eventually solve its serious problems?

If you look carefully at the European record since 1950, you see that time and time again, Europe has stepped up to its challenges. It has made use of crisis in the past to reform and to improve. So I’m betting on Europe.



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