May 13, 2013
The euro is barbarous, but it’s not (yet) a relic. Whether it can stop from becoming the latter depends on whether it can stop being the former.
Okay, that’s a bit unfair. For all its flaws, the euro is less doomed than it used to be. Foreign borrowing and borrowing costs have both fallen considerably the past year in its troubled countries. Those countries had, with the exception of Italy, depended on big capital inflows during the boom, which then disappeared during the bust. This sudden stop, of course, sent their economies, and with them their budgets, into free fall. But the usual antidote to this — currency devaluation — wasn’t available. Instead, the euro zone’s (healthy) northern bloc bailed out the countries small enough to bail out, and had the European Central Bank (ECB) backstop the ones too big to bail — all in return for austerity and structural reforms.
It’s been enough to end the euro’s acute problems, but not its chronic ones. However, even this success looks more like a failure the closer you look. As Gavyn Davies of The Financial Times points out, southern Europe has “fixed” its trade imbalances not by restoring competitiveness, but by destroying demand. In other words, the periphery isn’t exporting its way to prosperity, but importing less due to perma-slump. As you can see in Davies’ chart below, southern Europe still faces a big competitiveness gap with Germany — a gap that will take years more to close. In the meantime, unemployment is at catastrophic levels, and the mainstream political parties overseeing these ongoing catastrophes are falling into disrepute.