“The Eurozone Will Remain an Unhappy Marriage”
The Eurozone is a marriage in crisis, says economics commentator Martin Wolf.
“It’s just good enough to live with but not good enough to be happy about,” he said, analyzing prospects for the 17 countries that share the euro currency. “Divorce remains a possibility until the existing crisis resolves, and a truly good marriage seems to me at the moment very remote.”
Wolf is an associate editor and chief economics commentator for the Financial Times whose columns are considered a must-read by governments and business leaders around the world. He gave the the 2013 Investcorp Lecture on International Finance and Business at SIPA on October 22.
Wolf said that further adjustments will have to be made for the bad marriage to continue. The eurozone countries need to agree on a “minimum federal union” which would include some big reforms, including some sort of banking union and a safety net for countries dealing with crises, he added.
The British economist’s talk came at a moment of relief for the embattled Eurozone countries. There have been some positive signs for the area recently, such as a return to growth in the second quarter and an increase in investor confidence.
Wolf noted that the structural adjustments made by some of the countries most in trouble are showing results, in particular the “massive” improvements in productivity of Spain and Ireland. The adjustment process has begun but will be long and slow, he said.
“These countries are adjusting in the context of a stagnant economy and that is not much help,” he said, referring to still-poor Eurozone demand.
Continuing with his metaphor, Wolf said if the marriage manages to stay together, the Eurozone will become stable but not very dynamic. Since Germany has the upper hand on policies, the Eurozone as a whole will resemble a bigger but weaker version of Germany itself. “Germany, like Japan, is a country that has absorbed completely the notion that stability is the higher goal of policy.” he said.
In Wolf’s view, Germany is in a position to export this culture and is not finding much resistance from other countries’ leaders. “I think in most European countries that is not a difficult sell,” he said. However, he added, the problem of German-style financial policies for some Eurozone countries — he cited Italy as one example — lack the German industrial strength and they may end up with structurally weaker economies.
Wolf said he believes a break-up of the Eurozone is not inconceivable but is quite unlikely due to the deep motivations and interests of its members. Many people in the weaker economies see Europe as a solution to long deep-seated problems, and alternatives such as isolation are not attractive.
“If you talk privately to Italian, Spanish, Irish, or Portuguese people, they will all have powerful cultural, political, and economic reasons” to be part of the European project, he said.
Germans, even though they dislike the prospect of writing off the Euro project, also disregard other alternatives, Wolf suggested. He said German industrial and financial sectors would have to suffer a painful adjustment (in the event of a breakup) and the Eurozone satisfies Germany´s historical goal.
“Germany has got what it wanted: a stable democracy surrounded by peaceful and stable democracies, and it has the single most important voice in this conglomeration.”
— Fernando Peinado MIA ’14