Dani Rodrik on the Eurozone crisis Post author By Kevin O’Rourke Post date September 17, 2013 Dani Rodrik has an excellent presentation on the Eurozone crisis here. (H/T Eurointelligence) Categories In EMU 4 Comments on Dani Rodrik on the Eurozone crisis ← Schauble on the European Recovery → Leaving Certificate Economics 4 replies on “Dani Rodrik on the Eurozone crisis” The concluding slide is worth quoting because I think it summarizes the Keynesian position vis-a-vis Europe quite well: “Ultimately, a workable economic union requires reduction in structural heterogeneity (in institutional arrangements, e.g. labor markets) restrictions on national sovereignty and diversity So some version of the German argument is right for the long run: countries need to look more like each other if they want to inhabit the same house of course, what that house ought to look like (German style or not) is a political decision that is preferably made by all in democratic fashion. But euro zone faces a short term problem that is much more Keynesian in nature and for which the longer term structural remedies are at best ineffective, at worst harmful. Too much focus on the structural problems, at the expense of Keynesian remedies, will make the long run unachievable and hence irrelevant” I think the author is mistaken in believing that a more homogeneous level of competitiveness is the only workable long term arrangement for the Eurozone. An alternative arrangement, which would be a negative outcome but a stable one, could be based on the “Mezzogiorno effect”: a subset of competitive economies that are able to hold their own on the world stage provide a permanent system of economic transfers to a second group of permanently uncompetitive economies. The latter group become economic backwaters in which the main activity is disbursement of said transfers. Similar to the arrangement that has operated in Italy between the north and south for many years. The danger of a supposedly “short-term” Keynesian approach is that it leads inexorably to the Mezzogiorno outcome. St Augustine has already been cited in these passages, “let me do what is right, oh Lord but not yet”. In economics, especially where inter-state cooperation is concerned, there is no reason to doubt that “not yet” = “never”. On the other hand the author’s proposal debt write-offs is a good one. “Germany must…” hahahaha. Ambrose Evans-Pritchard right on the money in this article. I particularly agree with this comment. “I apologise for suggesting that German reforms under Schröder have been vastly overblown, and that German competitiveness gains have been chiefly the result of a beggar-thy-neighbour wage squeeze at the cost of EMU trade partners.” blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100025568/my-grovelling-apology-to-herr-schauble/ Are we in a race to the bottom with Germany leading in wages and Ireland taking the cake in corporate taxes. Enter the Ghost of CAESAR ‘How ill this taper burns! Ha! who comes here? I think it is the weakness of mine eyes That shapes this monstrous apparition. It comes upon me. Art thou any thing? Art thou some god, some angel, or some devil, That makest my blood cold and my hair to stare? Speak to me what thou art.’ The Tragedy of Julius Caesar (1599), Act 4 Scene 3, by William Shakespeare Dani Rodrik generally produces interesting material. The federal union seems to be working as well as the European Union. Republican extremists have forced the Fed to put the taper on hold as another debt ceiling crisis looms, just as the economy has shown some signs of sustainability despite arbitrary spending cutbacks. On Tuesday, Olli Rehn, the EU’s top economics official, was in Rome irritating politicians while in Washington DC, it was reported that the typical American family in 2012, earned less in inflation-adjusted dollars that its counterpart in 1989. http://www.finfacts.ie/irishfinancenews/article_1026562.shtml On debt forgiveness, who can afford to bailout Italy? It does not appear to have the national will to help itself – where it can. The recent years have shown that unless there is a local buy-in to whatever it suits to call it – reform? reducing red tape, making easier for people to start a business, attract FDI projects, reduce corruption and so on – outside monitors become useful targets for excuses. There should be a mechanism for countries to quit the EMU. However, armchair experts who believe that this in itself would be a panacea would likely be proven to be fools. Comments are closed.