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Greece’s troubles will haunt the Euro

by Andrew White  |  February 4, 2015  |  Comments Off on Greece’s troubles will haunt the Euro

I don’t write book reviews for books I am only half way through reading.  But I noted in Tuesday’s US print edition of the Wall Street Journal an article titled, “Europe Stimulus to Lift Biggest Naysayer, for one.”  The article highlights how Germany will benefit from the ECB’s massive QE program.  The part of the article that caught my attention was a comment made by Germany’s central bank president, Jens Weidmann, noted in the article by “saying that the ECB’s massive stimulus would fail to address the euro zone’s debt and competitiveness problems.  The program, he says, will take pressure of countries such as Italy and France to revamp their labor market and push through other economic overhauls.”

So you might think this as political hyperbole, or anti-ECB politicking.  That is until you read, The Euro Trap, by Hans-Werner Sinn, 2014, Oxford University Press.  I am but half way through and the data and arguments exploring and exposing what happened in the run up and after the euro is simply alarming.

The euro itself had such a calming effect on interest rates for countries joining that it actually created the very bubbles that now threaten its own existence.  With euro membership in the near-future for counties like Greece, Portugal and even Italy, such countries were “forgiven” by the market for the profligate spending.  In effect these countries were joining the euro in order to buy their way into German interest rates.  Their debt burdens were reduced as a result, thus allowing the opportunity to reduce debt more cheaply.  These countries did not and in fact increased debt and went on a spree to pay themselves more than their economic productivity would have allowed.  This is what Mr. Weidmann is talking about.  With the euro introduction those same countries forged ahead of other counties with higher wages without any real improvement in productivity.  The euro made this possible. And now these issues are again at the center of the underlying strains and imbalances across the euro area/

The book is chocked full of information you just have to see to believe.  The euro is far from safe.  There are just too many organic or structural forces at play.  It is amazing it [the euro] has lasted this long.  After reading half the book I recommend it.  It’s the closes thing an economist gets to a thriller.  Reading it you hope that the murder is caught and you seek a happy ending.  The problem with this thriller is that it is still being written.

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Category: economic-growth  economic-history  economic-productivity  economy  euro  european-central-bank-ecb  

Andrew White
Research VP
8 years at Gartner
22 years IT industry

Andrew White is a Distinguished Analyst and VP. His roles include Chief of Research and Content Lead for Data and Analytics. His main research focus is data and analytics strategy, platforms, and governance. Read Full Bio

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