Friday, January 14, 2011

Krugman Asks: What Will Europe Do?

Image credit: Fotopedia, reduced by Cujo359

Economics professor and New York Times columnist Paul Krugman wrote a terrific article yesterday explaining where Europe, and the euro are likely to be in the next few years. It's not a pretty picture, filled as it is with the combination of narrow national self interest and dysfunctional politics. This may be the quote that best sums things up:
In early December, Jean-Claude Juncker, the prime minister of Luxembourg, and Giulio Tremonti, Italy’s finance minister, created a storm with a proposal to create “E-bonds,” which would be issued by a European debt agency at the behest of individual European countries. Since these bonds would be guaranteed by the European Union as a whole, they would offer a way for troubled economies to avoid vicious circles of falling confidence and rising borrowing costs. On the other hand, they would potentially put governments on the hook for one another’s debts — a point that furious German officials were quick to make. The Germans are adamant that Europe must not become a “transfer union,” in which stronger governments and nations routinely provide aid to weaker.

Yet as the earlier Ireland-Nevada comparison shows, the United States works as a currency union in large part precisely because it is also a transfer union, in which states that haven’t gone bust support those that have. And it’s hard to see how the euro can work unless Europe finds a way to accomplish something similar.

I should point out that international trade is Krugman's area of study. If there are any experts on this sort of thing, he should be considered one of them.

Europe's problems are different from ours. As Prof. Krugman points out, European countries have better social safety nets than we do - for the average person, the situation is probably less dire in most of those countries than ours are in America. But, on the other hand, the different countries of Europe, while mostly using a single currency, don't help each other out in the way that our federal government system does our individual states.

What the future holds is very important for us here in North America, as well as in Europe. Europe is a big trading partner, and collectively is our biggest military ally. How it goes will, to a significant degree, determine how our future goes as well.

The article is well worth a read, if only to understand what's been going on, and what it means for us.

No comments: